risk Archives - J Darrin Gross Podcasts

How to Consistently Make Money in Real Estate with Ken Gee – CRE PN #325

Ken Gee 0:00

I was getting everybody that applied for the apartment, didn’t have good credit. And I thought, oh boy, here we go, this isn’t going to be good because I need someone to pay the rent. And then I met this wonderful woman from the city of Shaker Heights. Her name’s Karen, I won’t say her last name. But she taught me that can if you will make your property nicer. If you will invest in your unit and make it really nice. You’ll be able to collect more rent and guess what the good people will come. And I asked her I remember vividly this conversation. I said, Well, Karen, how much do I need to spend on this unit? She said only about $5,000. Well, the lump came back in my throat. I said, Are you kidding me? five grand, where am I going to get five grand, I just spent all my money to buy the property. So I took the leap of faith, I did spend the five grand and sure enough that rent that I was at 479. I went to 599 because now I had a much nicer unit. And all of a sudden the applications came from really good people. And I thought oh my goodness, this is unbelievable. You know, that was a huge deal for me. And the introduction of the value add concept to me iO iO. Really a good chunk of my career to that that wonderful woman who, who told me to build it, and they will come because she was right.

Announcer 1:16

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from experts.

J Darrin Gross 1:35

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Ken Gee. Ken is a CPA and real estate broker. He’s also the founder and president of the KRI group of companies, which he started in 1997 with a purchase of a 28 unit apartment building in Cleveland, Ohio. Since the beginning KRI has evolved into a full service real estate company that specializes in multifamily apartment investment, syndication and property management services. KRI has owned more than 55 million worth of multifamily properties and managed over 15,000 apartment units, collectively worth more than $1 billion.

And in just a minute, we’re going to speak with Ken about how to consistently make money in real estate. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests arm, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe.

With that I want to welcome my guest, Ken, welcome to CRE PN Radio.

Ken Gee 3:17

Thanks so much for having me.

J Darrin Gross 3:19

I’m really looking forward to our conversation today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Ken Gee 3:28

Sure I grew up in Toledo, Ohio, came to Cleveland in the early 90s. where I started, I came to claiming to be a commercial lender spent five years there, transition my life then to be a CPA, went to work for Deloitte for seven years. And then decided that was working way, way way too hard for everybody else and decided that I needed to I needed to get into real estate. When I was at the bank, all I heard was my customers making tons of money in real estate. Then when I went to Deloitte, all I saw was a massive real estate tax practice in our local office. And I said you know what, I’ve got to get into this. So that really was what started this whole process. And I like you said I bought my first property 28 unit building and shaker square, which is in Cleveland, Ohio, and then been going ever since. Well, it’s awesome.

J Darrin Gross 4:26

But and I’m guessing you’ve seen just a few things since that first property that you you. You bought. I’m kind of curious. What do you remember most about that first deal?

Ken Gee 4:39

Yeah, what I remember the most about that first deal was the golf ball that was stuck in my throat when I was doing the deal because it was a huge mortgage. At the time it was $460,000 that was massive. At the time I couldn’t have paid that mortgage off of fighting to save my life. So what I was doing was risking really everything to get started in this business. And it was stressful, even though I’d worked really hard to try to understand the business tried to make sure I knew what I was doing at the time I was a CPA and I had some lending background. So, you know, I felt fairly well informed, but it doesn’t change the fact that you’re not ready for that stress that you get when you sign on that loan. So, you know, I’m happy to say that, you know, it went away very quickly, right after that deal closed, and every new deal that you do, you know, there’s stresses associated with every deal. But you know, it’s been far easier since then. And that’s why I always tell everybody get over that first deal, because that first deal is a big one. And then you’re going to deal with emotions that you’re you didn’t expect and once that’s over, it becomes a lot easier.

J Darrin Gross 5:47

Now that’s, that’s well put the first deal Did you do it solo? Or did you syndicate or have investors in the

Ken Gee 5:54

piano? Great question. So I actually borrowed half the downpayment on my home equity line of credit, and I invited family member in to do the other half. So we kept it in the family, because at the time, you know, I couldn’t with a conscience ask someone that I didn’t know to invest money with me, because I really hadn’t proven myself yet. So my family was, uh, you know, willing to take a risk on me. And I’m thankful that they did, because that’s how we got started.

J Darrin Gross 6:23

And how long did you keep the property?

Ken Gee 6:27

Actually? Three years? Three years? Three years? Yep.

J Darrin Gross 6:30

And in three years, how did the property returns on that first deal?

Ken Gee 6:37

Yeah, interesting. little story, about a couple months in to that deal. I was getting everybody that applied for the apartment, didn’t have good credit. And I thought, Oh, boy, here we go, this isn’t going to be good because I need someone to pay the rent. And then I met this wonderful woman from the city of Shaker Heights. Her name’s Karen, I won’t say her last name. But she taught me that can if you will make your property nicer. If you will invest in your unit and make it really nice. You’ll be able to collect more rent, and guess what the good people will come? And I asked her I remember vividly this conversation. I said, Well, Karen, how much do I need to spend on this unit? She said only about $5,000? Well, the lump came back in my throat, I said, Are you kidding me five grand, where am I gonna get five grand, I just spent all my money to buy the property. So I took the leap of faith, I did spend the five grand, and sure enough that rent that I was at 479, I went to 599. Because now I had a much nicer unit. And all of a sudden the applications came from really good people. And I thought, Oh, my goodness, this is unbelievable. You know, that was a huge deal for me. And the introduction of the value add concept to me, I Oh, I Oh, really a good chunk of my career to that, that wonderful woman who, who told me to build it and they will come because she was right.

J Darrin Gross 8:02

Now I love that, you know, the kind of the experience of you just spent all your money and and I mean, did you have any kind of a plan as far as renovation or it’s more about just Lisa keep the place leased up. So

Ken Gee 8:15

I was pretty, I was pretty naive back then I thought I was just going to buy it, hold it for a while rent would slowly go up. But I would make money. And I actually paid an attorney to sort of advise me and he thought, you know, what, can in three or five years, you’re probably gonna make 100 grand on this. And I thought, Oh, my goodness, that’s, that’s unbelievable. Did I have the same level of business plan that I would have now? No, absolutely not. I didn’t because I didn’t even understand. You know, there was a lot I didn’t understand. So she actually helped me create the business plan on the fly. And we’ve been really implementing that value at concept ever since. And so three years later, you know, I’m happy to say that we sold it. We each put in 35,000 we each got back 100. So you know, in, in, in my life at that time, making that kind of money was just obscene. This was just unbelievable that you could do that in three years. So that’s why that’s why I’m here. That’s why I continued on with with with the process.

J Darrin Gross 9:15

Not I mean, those returns are impressive. anytime they can if you can triple your money and you know, three years that’s that’s just about right. 30 3030 was Yeah, so I think those are respectable I think they today they’d be rolled glass. That’s That’s great. So So your first deal goes, Well, did you do any additional deals during that first three years? Or was that kind of your primary focus, get that one? up and running? You sell what When did you do your next deal?

Ken Gee 9:48

Yeah, that’s that’s a good question. The second deal, it took me a little bit of time. So I did. I did three deals a total of three deals during that three year period. The second one came shortly after I Got my education from Karen. And I did have a plan the second time, and I had the I had my value add plan, I was gonna go in and prove the units, the lender would advance some funds to help me do that. As long as I showed them that I did the work, got the lease rents that I promised that I promised them that I would get, they would then pay for the renovations. So that was deal number two. And then deal number three was just a great, wonderful building in that same area, all these properties were in the same area that I bought, and we all ended up selling them all at the same time. So yeah, I just I kept trudging forward then and just doing deal after deal after deal, because once in this business, once you feel that success, you want it again, I mean, who wouldn’t want to make that kind of money, right? So so you’re going to try to do it again and again and again. So

J Darrin Gross 10:51

got it. So your your first deal you did with family? The second? And third, were those also family? Or did you reach out beyond your,

Ken Gee 10:59

The second and third deal actually was able to do it myself by myself. Okay, I found creative ways to finance it. If you look back at our track record, our track record is actually out on veribest.com. They verified our track record. But it’s so it’s there for everybody to see, those early deals that we did were very highly leveraged. So the returns were just crazy. We don’t use that level of leverage now because we use other people’s money. And you know, there’s lots of reasons why we would do that. But you know, when you’re getting started, you do whatever you have to do to get started. That’s what’s important.

J Darrin Gross 11:33

Right, right. So well, that’s impressive. So the first deal, you did have a partner, the second and third, you were able to do on your own. At what point did you become more of a syndicator? You know, start raising capital?

Ken Gee 11:49

Yeah, good. Good question. So probably in I think we bought our which indicated our first deal in the mid 2000s, early to mid 2000s. And, and, you know, grew slowly during that time. And most of our syndication work has been done, really in central and northern Florida. So the company originally grew up in Ohio, we did a bunch of deals in Ohio, and then about 10 or 15 years ago, I wanted to go to a growth market. So we started investing, or investigating Florida, central and northern Florida. And that was where I think we’ve syndicated out three or four deals there. I can’t recall now. And we currently have a fund that we just finished raising for about $13 million. And we’re out now trying to deploy that that capital. So we did for a period of time between 2000 and mid actually, it must have been Yeah, 2004 we did some deals on our own with with one other partner. And then we really went full boat into the syndication world. Because what we learned was, once we felt like we know what we were doing, we felt comfortable inviting other people into our deal. And then that allowed us to grow even quicker, and allowed us to give them you know, pretty good returns as well. So that’s why we made that transition. And it just made sense. And it’s been going well ever since

J Darrin Gross 13:15

contra. So you mentioned you know, having confidence, or I guess, a proven track record, something that you felt that, you know, you could then I guess provide a story or proof of concept to potential investors and stuff. What were some of the, the keys in that story? I mean, you know, the first one sounds like you’re flying blind, but you you’ve learned the value add concept in some other, you know, keys to create a financing for the next couple of deals. What were some of the key takeaways that you learned that were, you know, purposeful or or helped with relaying your story to to investors?

Ken Gee 14:03

Sure. So what happens as you gain more and more experience in this business, you start to understand exactly what makes real estate investors successful over the long term. Right? So a lot of people can do this, maybe once, maybe twice. But if you’re going to do this over and over and over again, you really need to understand why each deal is successful. So you know, I generally there’s four things that you really got to understand. One is just supply and demand, right? We’re in the apartment world. So the supply of inventory is important, right? If they’re building like crazy in the area that you’re trying to invest in, you need to be careful. You have to make sure there’s enough demand to absorb that. So what we’re looking for is a pat is a is a favorable demand and supply equation. We want demand to exceed supply. That’s what drove us to Florida because that that setup has been in Florida for years and years. decades now. And it’s only been exaggerated by the pandemic, then the second thing we understood is how do we create value in every deal, because every deal is going to be a little different. Sometimes most of the value you create is going to be management related, sometimes it’s going to be physical improvement related. But or most of the time, it’s a combination of the two. But what we learned over the years, so she got to understand exactly how you’re going to create value, and then just get better at executing on that strategy. So that was the second thing that that is the second thing that I think sets long term, successful investors apart from shorter term ones. Now the third thing, and this was really learned the most through Oh, 7080 910. Think back to that financial recession. I mean, that was horrible. And the number one thing you learned through that process is to manage your debt manager maturities make sure that you have planned for the as much as possible, right? apartments generally did well, during that time period. The only reason apartments didn’t do well, is when the loan matured at the wrong time. And then it didn’t matter if the property was a wonderful property, it didn’t matter if it was cash flowing like crazy, the bank had to get it off their books. And at the time, no one was doing no new loans. So people lost their buildings, because their debt just happen to have matured at the wrong time is terrible, there was no reason for that to happen. But again, what that does is that teaches us to manage your maturities make sure you have an out make sure you have a way to continue that debt should you need to just because of a bad timing issue, you don’t want to have have a problem. And then the last thing we learned, we have learned over the years is just watch cap rates, you got to understand cap rates. And, you know, cap rates are fairly predictable, they’re dependent on two things. One is the interest rates on the debt that you’re gonna get. So we always watch that and have a pretty good feel for where we think they’re gonna go. And then the other piece of that cap rate is what investors require for their return. And so that right now, cap rates are compressed, because there’s so much money chasing deals right now that investors are willing to accept smaller and smaller returns. So when we have low interest rates, low investor return requirements, we have relatively low cap rates. So when we do our modeling, this is the long term successful investor concept, you need to make sure that you’re planning your exit at a higher cap rate, because that means the value might go down, if interest rates go up, or not, as many investors are chasing the same deals, they may not be willing to pay as much for that cash flow that that property creates. So you’re gonna want to make sure that you model it in your in your formula, so that you’re prepared for that. And you know, what’s going to happen if cap rates were to move against you? That makes sense?

J Darrin Gross 17:55

Yeah, no, all of that makes sense. It is, you know, especially looking back here and just last 10 years, you can kind of tell, you know, the, or the story, if you look back, you can see how it all, you know, connects I mean from, like you said, Oh, 708 when, when the market was melting down, and and nobody was willing to lend and if you if you did get caught and had to refinance, and there was nobody willing to, to lend. That’s kind of what a great a lot of the opportunity for, you know, newer investors are, I mean, clearly it was it was a it was a problem if you had a property you needed to refinance was an opportunity if you had cash and and had an opportunity to pick up a property cheap from a lender that are you know, not necessarily a lender if you weren’t foreclose, but just somebody that had to let go the property. Yeah, exactly. But But even even having said that, though, I you know, what’s interesting to me is, I’ve been doing this podcast here for, I guess, almost six years now. And in all the time that I’ve been doing this, that the theme has been that, hey, you know, it’s been a good run, we’re probably in the late ending late innings. You know, we expect this thing to have a correction kind of thing. But I, you know, I’d say that, you know, by all accounts were were well into a doubleheader, or, you know, with extra innings, I mean, just based on the run in, in its, I think the other thing is that all of these economic factors that maybe were the cause or had something to do with the last cycle. Everything we’re looking at right now, pandemic, plots of government cash being pumped into the system. You know, investors looking for a return, low interest rates, all kinds of change, anything that people thought might be the case and now it’s it’s kind of Like really it really requires you to be sharp and kind of assess you know like like you were talking about you know supply and demand you know how to manage your debt you know make sure you have some terms that can that can last a while and kind of keep an eye on those those cap rates I mean that’s pretty well that right there I mean I think sums up you know, a good advice for any investor looking at an opportunity and certainly in the last six or seven years

Ken Gee 20:32

Yeah, no, I agree. 100% Absolutely. And when we look you know, I have this conversation with a lot of people all the time and that is are you afraid we’re at the top or are you afraid you’re at the top and I have it with a lot of very smart people because I’m looking for some disagreement. And you know, we’re in we’re in central and northern Florida, the demand supply setup in central and northern Florida has been favorable for a very very, very long time. And I I’m looking one of those two things has to break in order for me to be any really concerned about Florida, we have to have builders somehow figure out how to buy bc class asset because that’s what we buy, right we don’t buy the brand new a stuff because then I’m fighting with supply from New builders right so they’re not building bc stuff they’re just not so I don’t see that changing I don’t see what can happen that can make that affordable for builders to come in and add tons of supply the PC market so now when I look at the demand side what can happen that can erode that demand and you know when I think about why people are moving to Florida, I mean they move there because it’s beautiful whether they move there because it’s a low tax state they move there now because they can live there and still do their jobs because so many more people can work remotely so there’s I’m looking for something to break that demand in order for me to be terribly concerned about investing in central and northern Florida there’s still a plenty of places that are very affordable in central northern Florida and that they’re going to people are going to continue to move to those areas the the coasts will continue to get better up I think and the growth has been between Tampa and Orlando and Daytona it’s been going across that I four corridor for years and it will just continue to do that. And when it gets to unaffordable in one area, say Orlando for example, you just get farther away from Orlando and you can find more affordable housing, more people come in, you see a cycle and I don’t see it breaking so that there are probably some markets that demand supplies setup is different. And if there is an economic slowdown or something changes that might affect them more, but I’m looking for those two things to change in Florida and I just I just don’t see it happening but I have my eyes definitely open looking for any cracks in the dam here to see if see if that is gonna happen and I just don’t see it yet. And everybody I talked to they’re looking for the same thing and they don’t see it either. So that’s why we’re comfortable buying at this point as long as we have the upside and rents which we do because of the demand supply situation.

J Darrin Gross 23:09

Right right now and even you know the kind of lesson you learn from Karen about value add I mean if you can find that opportunity that either the seller hasn’t exercised or hasn’t you know, doesn’t see that you can see there’s always the opportunity to increase the value you know, and I think one of the things I’ve learned is it’s all you can do through the you know, a remodel or renovation or something like that it’s the if it’s only just a management issue where you can raise rents or something like that I mean that’s that’s a pretty sweet little value add opportunity there do you in that marketplace I mean it’s clearly no secret you know, Florida is kind of a boom market I mean, I saw the meme out there that Andrew Cuomo was realtor of the Year for a Florida that was kind of a joke there from all the you know people moving exiting New York moving to Florida right and but but a lot of truth to that just based on like what you were saying just demand and so is you as you look in that market clearly there’s lots of demand for housing. There’s lots of investors seeking the same opportunities you know, one of the things you didn’t say but but you know, I always feel it kind of is part of that cap rate is is you know, if there’s if there’s a lot of investors seeking the same thing that’s gonna you know, push the rate cap rate down as well. do you how do you go about are you just plugged in with the market do You go direct to the sellers? Do you have broker relationships? How are you situated where you find your properties?

Ken Gee 25:07

Yeah, that’s a really good question. So we play in generally the plus or minus 100 unit range. And most people that play in that in that market in that space are syndicators. So that means they’re going to go out and try to get the deal locked up. And then they’re going to spend the next 45 or 60 days trying to raise the money to close the deal. So the seller kind of takes a leap of faith with that buyer. So there’s tons and tons of indicators in that space. Now, we are a fund where a private equity fund so now in the syndication world, the deal comes and then the equity comes in the fund world, the money comes first, then the then we have the money to go get the deal. So now when I compete against a syndicator, in that 100, say, 100 unit property, there’s when we compete this probably 95 90% of the bidders are syndicators. And here we come, we’re a fund we already have the equity raised, the seller knows that we that that equity raise risk is off the table. They know. So they also know that we’re very experienced, they also know that we have a very quick and easy due diligence process that it because we’ve been doing it for 25 years, right, we’re not going to drive him nuts, or her nuts with a retrade or, you know, little silly ass on due diligence questions and things like that, because sellers do like easy deals. So we’re a much more experienced much stronger buyer. in that market. Most fund managers, they don’t attack the 100 unit space, they’re up into three 400 units basis, because they’re trying to deploy more capital. So we become that big fish in the smaller pan, so to speak, which gives us the ability to win these deals. And then Remember, we talked about the fact that we’re a third party manager, so we’re third party managers in that same market. So that gives us another opportunity to integrate with these brokers, because they refer their clients to us. So we have a very unique relationship with the broker community in that not only do we buy and sell through them, but we also help them get deals done because we take their clients run their properties, make them more successful, and then what happens, they’re able to sell that client another property. So we have this really intertwined network that we’ve been able to develop in the central northern Florida market. So that’s how we get our deals. Because the reality of it is in a competitive market like this, the broker really controls who gets the deal. Because when a seller sells that property, he looks to the broker and ask them who is this guy? Who is this guy? Who is this guy? What do you know with him, Have you close with him before, he is using that broker to try to figure out who has the highest certainty a close and who’s going to really get the deal done, so that that seller has an easy sale and that’s critical and that’s why we spend so much time working on those relationships. Really, really super important in a competitive market like this.

J Darrin Gross 27:58

No, I was gonna say I think having the property management company for yourself and others makes a ton of sense. I mean, just in that because the operations of a complex really you know, having the efficiencies in the operations can really you know, make yourself quite a bit more more money I would think as opposed to on you know, unaccounted for or you know, expenses that that aren’t always easy to keep up with or whatever just but just having that that I guess inside track on the management I think it makes a lot of sense. Have you had any opportunities come from the properties you’ve managed were selling her the you know, the owner said hey, you know, Ken, we’re ready to get out of this one you know, is that ever come up?

Ken Gee 28:54

Yeah, you know, we’ve we have those discussions our clients come to us occasionally with those discussions and you know, if you’re a seller what I tell our clients because remember when when you become our client, we have this fiduciary relationship with you, right? I’m I’m your I’m your guy, right. So if you come to me for advice, I’m going to tell you what you really should do. And the reality of selling in a competitive market is you should market the property. If you do a side deal with me, that’s great for me, but I get very very concerned that my client is going to have in the back of his or her mind, you know, he kind of worked me for a sweet deal here and I you know, they kind of get at some point they run the risk that they’re going to be uncomfortable with the advice that I gave them and that was to sell your tell to sell to your friend Ken. Right. I get concerned with that. So our reputation and in all the markets are so important to us that I don’t I don’t even want to take that risk that something could later develop even though you know we’re getting deal done for them, but we get a deal done for us. But I don’t want them to think that I you know, I get it better. deal because because I was able to get to them early.

J Darrin Gross 30:03

Gotcha, gotcha. Well, I think especially if you want to maintain that relationship with the brokers, I would think that would be biased to, you know, not by the end of each week kind of thing.

Ken Gee 30:14

That’s true, too. Yeah, I didn’t, I didn’t talk about that. But you’re, you’re correct. But the real driving force here, when my clients and I have these discussions is I always want to tell them what’s right for them. Right, irrespective of my allegiance to brokers, or to anyone else, my first allegiance is to them. And I want to make sure that no matter what I mean, we go to our clients and say, you know, what, you have worked this thing, we have done a great job, you need to sell this thing, we’ll we’ll go to our clients and tell them that because you know, we know the market, we understand, right? We know what’s, what’s going on. So you know that that’s the real driving force. It’s not protecting the broker relationship, although that’s important. It’s more important that we treat our clients properly.

J Darrin Gross 30:57

Well, makes sense. So how many deals Have you syndicated over the course of your investing career?

Ken Gee 31:06

Yeah, that’s a good question I have to do. Let me do the math in my mind, price service, 678, something like that. We have a deal in process right now. With our fund that we just raised, we accept them get three deals out of that fund. That’s That’s the goal.

J Darrin Gross 31:21

katraj? And of the those funds have all of those gone fullcycle, or not the funds but the syndications have

Ken Gee 31:28

All but one, about one. Yeah, so we have not historically been a unit, some people get in this business to buy unit count, right to get as many units as you can, because that I guess it’s your bragging rights, then right? So we don’t do that we, because of our investors, we want to add our value, we want to leave some for the next guy, and then we want to go ahead and sell that asset. Because then it’s gone full cycle, there’s no way to argue with any valuation. I mean, investor went in, investor got paid investors done the whole deals done, and you know exactly how much you made on it. So we’re down to one soon to have two and, you know, two more after that. I’m sure we’re working on a number of deals right now.

J Darrin Gross 32:10

Gotcha. Well, it’s impressive, the number of of, you know, deals you’ve done and lessons you’ve learned and and the fact that you’ve now got a fund. That’s it. And for the reasons that you did, as far as you know, the opportunities that are going to, or just how you’ll be viewed, you know, in the market, as opposed to syndicators got to go out and raise raise a capital there, I think that’s, that’s a pretty unique and good way to, to put yourself in a competitive market is the capital’s over, already been raised. Right. So that’s good. Hey, Ken, if we could, I’d like to shift gears here for a second. As I mentioned, before we started recording. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically look at, we first look to see if we can avoid the risk. If that’s not possible, we look to see what we can do to minimize the risk. And when neither of those are an option, then we look to see if we could transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be their clients, the market, capital raising, you know, however, you would like to frame the question and the answer, but looking to see if you can identify what the biggest risk is. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. So if you’re willing, I’d like to ask you Ken Gee, what is the BIGGEST RISK?

Ken Gee 33:57

Sure, the biggest risk right now as I see it in the market, is it’s very difficult to find deals, that will work. And the reason I call that a risk, is, if we’re not able to make the deal work, and someone else does the deal, it probably won’t work for them either. So the risk here is that people will do deals that they really shouldn’t do, just to get the deal, right. If you’ve ever heard of FOMO fear of missing out, there is a lot of that going on. And if we you know, if we do lose a deal, it’s probably because someone else was concerned about missing out, they’re willing to pay more to make deals that didn’t make sense. A because maybe they’re inexperienced, or B, they just want to get in the game because they’re dying to get in the game. So that’s the biggest risk. I don’t that’s a risk to me, but I think that’s a risk to the entire industry. Because when people do things that they shouldn’t do, you you need to hope you’re in a growth market. That’s going to go fast enough to allow you to grow out of your mistakes. And if you’re not, then you’re going to get stuck with them, and it’s going to impact the market. So that’s the biggest risk. Now having said that, the number one reason we do multifamily is because I can’t find a better risk adjusted return profile. Everybody needs a place to live, they just, they just do, I can’t figure out a way to make that go away, I can figure out how to not need an office, I can figure out how to not need storage, I can figure out how to maybe not need medical, right, think about all the different assets, real estate asset classes, retail strip centers, I can figure out a way for that demand to really significantly decline. But what I can’t figure out is a way for you to not need a place to live. So as long as I have that, I view that as a relatively low risk asset. And then if we’re able to take that asset improves 1525 35% plus annual returns for our investors, I see that I look at risk very similar to the way the way you do, I shouldn’t be able to get those returns with this level of risk. But because we’re good at what we do, and because it’s real estate, and it’s leveraged appropriately, it we really are able to get a significant return. So the number one risk back to your question, is people doing deals that they shouldn’t do, because it’s it’s going to hurt the entire industry as a whole eventually.

J Darrin Gross 36:28

No, I think that’s something we’ve there’s been certainly waited breath, wait, you know, waiting to see, you know, where the correction is coming. So I, I think it’s inevitable. You know, but as long as there’s, you know, lots of cheap money, and, you know, willing willing investors are willing buyers, I guess, sellers are gonna take advantage of that. So we’ll see what happens. But, Ken, where can listeners go if they would like to learn more or connect with you?

Ken Gee 37:00

Sure. So one of the things I wrote I wrote a list a little while ago. Now it’s a it’s a small ebook. It’s called multifamily Real Estate’s a total game changer. If you go to our website, k Ri partners.com. Slash ebook, you can download this ebook. I’ll tell you why I wrote it. I wrote it for two reasons. It basically has two parts. The first part addresses the number one question that everybody has to ask themselves before they get into real estate. And that is, how did they know people are making a ton of money in real estate? They’re just trying to figure out how they get their piece. Right? Should they buy a single family a double? Should they buy an apartment building? Should? Should they go into Self Storage? Should they even do it at all? Should they invest passively with somebody like us? Right? So I helped them through that process? Because it is the question that absolutely everyone gets into this business faces. And I’ve seen it for 25 years, I’ve seen people wrestle with this. They just don’t know how it fits into their life. And so hopefully, the first part of the book helps the reader through that process. The second part, addresses what now now so when I go through that analysis, most people really should be passive investors because they have wonderful full time jobs. They you know, they make a lot of money, they do their thing, and they should truly just invest passively in real estate. Well, now the question becomes, how do you vet the real estate people out there that you can invest with? How can you how do you vet a fund sponsor? How do you give that a syndicator? How do you know that their fund or there’s the investment objectives match up with yours, and the risk tolerance that you’re comfortable with? So I take you through that process, I give you some insight into how our business really works? You know, what makes a syndicator tick, wait, why do they do what they do? And all of that stuff, help you understand the way the business works? Because then, and I also give you some questions to ask, right? So just how do you vet those sponsors, because I feel very compelled to help you, the investor, make a good decision about who you invest with. Because if you do, you’re going to be successful, and you’re going to keep coming back. And that’s what we really want for this whole process is for everybody to be successful because there’s no reason for anybody to fail in this business that we have so that the book is kr I partners.com. Slash ebook and download. It’s free. And you know, hopefully it is beneficial to whoever reads it. So that’s how you can reach us.

J Darrin Gross 39:21

Awesome. I can’t I can’t say thanks enough for taking the time today. I’ve enjoyed our talk, learned a lot, and I look forward to doing it again soon.

Ken Gee 39:31

Well, thank you for having me. You bet. For our listeners.

J Darrin Gross 39:35

If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 39:52

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Smaller Markets Low Risk Retail Success with Yoel Mayerfeld – CRE PN #314

Yoel Mayerfeld 0:00

You’re buying in the metro market, you’re often buying a higher rent. When you’re buying in one of our markets, we’re buying a much lower rent because the real estate, it costs less, therefore we can have these retailers operate at much lower operating expense. What we’re giving up for that, I think, is rent growth in our markets that aren’t going to grow as quickly as some of those Metro growth areas. We’re not going to get the big huge rent increases that historically some of them at Metro markets have had experienced. But we’re very happy to give up that growth for the higher going in yield and the stability of that yield. And as our track record is shown, you know, we’ve been able to maintain very, very stable, current cash flow for ourselves and our investors for for many years.

Announcer 0:50

J Darrin Gross 1:10

Welcome to Commercial Real Estate Pro Network’s, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Yoel Mayerfeld. Yoel is the CO CEO with Chase Properties, where he oversees the company’s asset management and financing. Mr. Mayerfeld joined Chase Properties as the Director of Finance in 2005. And in just a minute, we’re going to speak with Yoel about a winning investment in retail. While others have been quick to move away from the asset class Chase has been thriving in retail.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we encourage our listeners to leave a comment we’d love to hear from you. Also, if you’d like to see I answer my guests are, be sure to check out our YouTube channel. And you can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Yoel, Welcome to CRE PN Radio.

Yoel Mayerfeld 2:35

Thanks. Thanks for having me.

J Darrin Gross 2:38

Well, I’m looking forward to our talk today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Yoel Mayerfeld 2:46

Sure. So my background was in finance is where I started out after college, I was a derivatives trader, for many years, really focusing on risk. And towards the end of that first career, I was running an exotics derivatives book for a bank and was searching for my next career to be something much more tangible than exotic derivatives that I had to rely on sort of Monte Carlo models to solve difficult hedging strategy ideas.

So real estate was was really what, what was attractive to me, because I could I could understand how to evaluate the risk reward for real estate. So about 18 years ago, I left New York with my wife and we moved to Cleveland, and joined chase properties which historically had been a family capitalized, retail real estate developer and acquirer and had been there ever since.

J Darrin Gross 4:24

Got it? Got it. I gotta ask you real quick I derivatives. I know the word but I don’t know that I know what what that entails. I mean, when you’re when you’re trading for a fund, can you give a just a quick description as to what that what that entails?

Yoel Mayerfeld 4:39

Sure. So it’s really any any financial instrument that is you know, a derivative of something else. So in my case, it was equity derivatives. So it was derivatives of stocks. So an option like a call option or a put option or a swap are primary examples of derivatives. And then certainly their derivatives on commodities and fixed income. But what I spent time on was the equity markets. And for the first part of my career, mostly it was more vanilla structured calls, puts, swaps. And then the latter part, it became exotics, which are just much more complicated contracts between buyer and seller, that allow for different scenarios and different protection of risk or ways to speculate on volatility as an example,

J Darrin Gross 5:46

Got it. No, I’ve always kind of been fascinated how, you know, the the big money wins in a market that’s going up or down. And I’m assuming that, you know, a lot of a lot of the ability to win like that is to deal to do with kind of what you were you’re doing there is the ability to kind of structure those opportunities.

Yoel Mayerfeld 6:08

Absolutely. And I worked for banks during my career. So our other side of the trade was often hedge funds who are doing exactly what you’re talking about, where if they were volatility, our arbitrage hedge funds, they were buying that contract from me to do exactly what you’re saying, find ways to make money, regardless of the markets going up or down.

J Darrin Gross 6:39

Got it? Got it. I appreciate you sharing that. So you’ve been at Chase now since 2005. And you mentioned that the Chase was basically a a family run developer, I want to understand you

Yoel Mayerfeld 6:56

Correctly started nearly 40, just under 50 years ago, developing retail shopping centers, for Kmart really came up with the anchor way back when we started. And ultimately for other anchors, and then probably about 20 years ago, we really transitioned, when we saw that country didn’t really need any more retail, that there were enough opportunities in the existing retail to acquire good cash flowing shopping centers, we we probably then still developed in a smaller way, but move more into an acquisition mode of finding value or where maybe others didn’t see value based on our experience in smaller markets, which is where we’ve always thrived even from our development days. So our focus has always been in secondary and tertiary markets like to state the strong small markets so we we stay away from the real teeny tiny markets that maybe have less economic diversity. Two examples of towns you probably heard of are like South Bend Indiana is is a market we love or you know, I’m based here in Cleveland, Western Ohio if you’ve heard of that market for many of the markets, you probably haven’t heard of it you know, smaller markets in Kentucky that are super strong, super stable, great trade areas, we’re we’re able to find a retail hub and and the best center in that retail hub, in an in an isolated market where, you know, many counties come to our town, our retail center for their for their shopping.

J Darrin Gross 8:57

I like it easier to be a big fish in a small pond and then a little fish in a big pond kind of thing. So the the I guess the the question, I’d have territorial or the territory you guys operate in, is it primarily Midwestern or do you guys how far out do you get?

Yoel Mayerfeld 9:20

Yeah, it has been primarily Midwest, or as far west as Kansas. We’ve really been situated in. We look for centers in the Midwest, the southeast, and the Northeast, but it’s primarily been the Midwest and a little bit more of the southeast as of late. We love We love the Carolinas that’s been probably over the last 10 years we’ve entered into the Carolinas. But the Midwest has really been our bread and butter for most of our existence.

J Darrin Gross 9:54

Got it. So can you characterize the The difference, and I say the difference, because, you know, as of late, especially with COVID, and the Amazon effect on retail, there’s been a change that’s occurred in, in retail as far as more of your your Metro, primary secondary markets, and that, as opposed to what you’re experiencing in your tertiary and, and, and strong small markets. So I want to make sure I understand the question, right. Are you saying how are we experiencing the Amazon effect differently than maybe other retail readers? is it affecting you similarly to, you know, and I say this having interviewed other people about retail, and how it’s, it’s struggled in a lot of major metro areas. Recently, and I’d say the, the, the first you know, cause of that was probably primarily the the Amazon effect, but then that was accelerated, based on what COVID? You know, as is shown us, yeah, with the restriction of people moving about and their unwillingness to go out, or their inability to go out and shop. And so I’m just kind of curious from, from your standpoint, investing in the markets you’re in. Have you seen any effect caused by Amazon and or has COVID affected any of your, your tenants? maybe it’d be the first place to start is, you know, I guess the type of tenants you you have, are they primarily anchor tenants?

Yoel Mayerfeld 11:48

Yeah, so we typically buy centers that have that are anchored or shadow anchored, as we call it, which means it looks like it’s part of the shopping center, but we don’t own the real estate for a target or super Walmart. And then our tendency is typically the TJ Maxx is Ross dress for less Dick’s Sporting Goods hobby lobby’s, that’s, that’s the part of the real estate that will own so Junior anchors, but anchored by a bigger box, typically. So that’s how our shopping centers typically are laid out and look, in terms of Amazon, and COVID. Similar answers to both I would say, but more importantly, it would be Amazon, because that’s going to continue well beyond COVID. And yeah, we absolutely have fared differently from our, our friends in the metro market business. I would say it’s more lucky than smart. You know, when we started focusing on these smaller markets, it wasn’t because of an expectation of an Amazon. You know, funnily enough, I started my career at Bankers Trust when Jeff Bezos was there at Bankers Trust. And he went on to start Amazon and I went eventually to invest in in the opposite of Amazon in bricks and mortar. So you know, no, nothing, no expectation in what was coming with e commerce when we when we started focusing on on these smaller markets. But luckily, because we’re in these isolated markets, what are retail relationships our friends in the retail business tell us is that we are needed so much more. Our physical locations are needed so much more than in the metro markets, were there several of their stores. So let’s say Best Buy as an example. You know, often, our best buy in our shopping center is the only Best Buy for at least 50 miles. What they tell us is that their online customers will not be comfortable buying online, if they don’t have a store that they in their mind, know that they can return to or go and check it out or ask questions to. So they may be an online customer, but they’re much less likely to be an online customer if there isn’t a store for 50 miles. So what that allows is for the retailers to really consider our location as a meaningful hub for them to enhance their online presence. And then more recently, as these retailers have figured out that their stores need to be almost mini distribution centers. You know, it’s it’s been very targets been very public that I think 95% of their online orders are coming or being shipped from their store directly. And that’s happening on a major scale like a target and Walmart, but also on a minor scale where the buy online, pick up in store are so meaningful for these retailers, that having us in these locations that are far from the next location, make us much more important to those retailers. And we’ve seen that in that even if our sales performance, which is the number one factor in, in us, buying and keeping owning certain shopping centers, isn’t as high as maybe a certain Metro market, we know that its relevance is much higher. So that’s been a big help for us. And why I think we haven’t seen stores close in our portfolio. Now the Amazon effect on the negative side, which just affects us the same way, as

Metro markets is any of the retailers that hadn’t figured out their strategy to compete with Amazon, which the winning strategy has been their omni channel marketing their their ability to integrate bricks and mortar with online, the ones that didn’t, weren’t able to figure that out. And Amazon and really COVID also expedited their demise. And their bankruptcies certainly have affected us anytime we have a vacancy. That’s, that’s typically a challenge for us, we have to go and fill it. But our strategy in really owning the best center and a given strong market allows us to mitigate for that and refill that space pretty quickly. I mean, right now we’re at our highest occupancy we’ve been in years, when we, when we did lose tenants to bankruptcies, we’ve been able to fill their spaces very quickly. And that’s that’s been, I think, partly due to our strategy of having this monopolistic position in a given market or trade area.

J Darrin Gross 17:10

No, it sounds definitely, you know, you’re certainly in demand. If you’re able to fill the big box, I know, like, I grew up in the Midwest and in kind of suburbia of Kansas City. And one of the things that I and now I live in Portland, Oregon, but one of the things that I’ve I’ve always been, you know, he says comparison is how like, and then the Midwest. The the availability of space was, like, unlimited. And so that a lot of times he had this kind of a leapfrog effect where, you know, you’d have a new suburb, but then there’d be the one that grew beyond that one. And there’s almost like a proportional value placed on your your property based on how new it was, you know, even though you’re moving further and further and further from the corner, I think some of that’s kind of is right, or it’s, it’s recalibrating, and there’s kind of a recognition of wanting to be closer to the core, in some cases, but But what was was kind of eye opening for me was to see these great big, huge malls, just going dark, you know, and I was like, Well, how many malls? Can you support? I mean, if you keep building a new one further out, people are going to be drawn, you know, attracted to that, and you had these these big mega malls, but what in the market to your, you know, based in it sounds like, you know, if you’re the Center for 50 miles? I mean, what kind of a population Do you guys look for? when you’re when you’re making an investment? Is there a, is there a, you know, target population size for a surrounding area that you guys are minimum population size? For?

Yoel Mayerfeld 18:56

Absolutely, we won’t look at anything less than 50,000 people in the trade area, but typically, we’re closer to 100,000, at least. And that’s typically our sweet spot. Got it.

J Darrin Gross 19:09

On the in those markets, do you find that the cap rates and the return I mean, cash flow return? More or higher cabinet? I would assume a cap rate than what you would find in a in a metro.

Yoel Mayerfeld 19:27

Yeah, that’s always been part of our attraction and draw is we’ve you know, typically been at probably about a 200 basis point, spread and cap rate compared to our Metro market. Competition, so where Metro markets might have been at six caps we were at eight caps and that 20 basis point spread probably remains the same today. We’re buying in the eight, eight cap approx range for what we’ve always felt were more stable flows of income, then then those Metro markets, which due to their competition, just have a lot more potential risk. you’re, when you’re buying in Metro market, you’re often buying a higher rent, when you’re buying in one of our markets, we’re buying a much lower rent because the real estate, it costs less. So therefore, we can have these retailers operate at much lower operating expense. So what we’re giving up for that, I think, is rent growth in our markets that aren’t going to grow as quickly as some of those Metro growth areas, we’re not going to get the big huge rent increases that historically, some of them in Metro markets have had experienced, but we’re very happy to give up that growth for the higher going in yield and the stability of that yield. And as our track record is shown, you know, we’ve been able to maintain very, very stable current cash flow for ourselves and our investors for for many years.

J Darrin Gross 21:20

Katherine, I want to circle back quick, you’d mentioned something about the omni channel distribution plan for the successful retailers. And in the beginning, you’d mentioned that the the chase properties had built and done a lot with Kmart. Having been a former Kmart employee while I was in in high school, and also I worked at Sears I think, when I was in high school and college the it always I mean it just it really it’s amazing to me that the the company that had the Christmas wish book that had you know, basically you know, they were the retailer basically was not able to you know, figure out this omni channel thing and get get basically left in the dust and I believe I mean I thought I saw something where Sears has gone bankrupt. And I thought Sears had acquired Kmart at one point I it’s my history my retail history is very fuzzy but i think that’s that’s what it was. Yeah. So I was gonna ask you Do you still have any case Kmart even a brand is is it still any of your tenants are evolving,

Yoel Mayerfeld 22:38

don’t we so you know what one one thing I think we do a good job of is trying to get ahead of of when we see a trend going the wrong way. We’re typically long term holders of real estate but when we’re seeing either demographic changes in one of our markets or retailer issues in a given center that where we don’t feel it would be a creative to replace that retailer if they go out of business we look to sell so we sold out of our Kmart you know many years ago and see or anything that we had with with those as anchors, which we tried to get out of so fortunately, we didn’t sit and wait for their demise. Now in some cases, I have friends that that stuck with Kmart that they really wanted back from the retailer because they were usually in paying such low rents that if you were in a if you if you could wait it out if you could wait till they would not want to pay rent anymore and you could because the stores were all performing terribly. You could you know, do something with the space that would be considerably accretive compared to the Kmart right you were getting that those became wins for many people but we were able to sell before for Kmart was as bad as it was.

J Darrin Gross 24:16

You mentioned you guys are gonna love long term holds. Is is the Do you guys run a fund or do you is it primarily a private family fund or how the hell

Yoel Mayerfeld 24:31

Yeah, we we did we started bringing outside capital in through a fund that structure probably 11, 12 years ago. So we we currently are in our fourth Fund, which we’ve been typically the biggest investor in the fund. But we have several friends and family and friends of friends that have invested with us and been a part In this the same strategy and, and that’s how we buy our retail today.

J Darrin Gross 25:07

Got it? And hold time, what is a typical hold time for you mentioned you you get out of something, if you realize it’s going, you know, you the future doesn’t look bright. Is your whole time forever? If If not, or?

Yoel Mayerfeld 25:22

Yeah, that’s a great question. Because sometimes people ask me, what’s the difference in how you invest when you were investing for the single family, versus when you started taking outside investors. And that’s, that’s the biggest difference. It’s not that we invest differently, but we have to structure something differently, because most investors want to know that there is a defined exit a time where they’re going to get their initial capital back. Because, you know, they may be thinking, like, they might be dead, and they want to know, when their children will see their money back, things like that. So for our funds, we set up seven year holds with three, one year extension period, so it’s a seven to 10 year hold, which would have been different than our typical, by great real estate forever, only sell when we see trends moving against us, or for some reason, we feel we’re not the right operator of that center, maybe it’s too far from us, and are too far from the rest of our centers for us to lease it and manage it as well as, as someone else might be able to. But otherwise, we’re really long term forever holders. But what we do have is the ability then to, if we feel the real estate is great to buy that real estate, along with all of our investors, at the end of that phone life, so that we could theoretically continue to hold that asset forever. But it allows for investors, if they want that liquidity in the seven to 10 year period, to to be able to get have an exit.

J Darrin Gross 27:11

That’s always been kind of, right, I should say always, it was kind of an aha moment for me to understand that. You know, and I’m a very small time investor, small residential stuff, but I’ve always done it. And my just my wife and I have been the Capitol, and pretty much forever holding and just kind of understanding how the investors I mean, if you’re going to bring in other capital, you’ve got to have an exit strategy because they like the like I said, they want their money back. So just a different structure and and just understanding that. So I was looking here are you finding in the markets that you are operating in? Are there lots of opportunities? Or is this kind of a you know, a lot of Commercial Real Estate’s kind of a fairly close to the vest if you’re, if you’re a known entity, there’s you’re getting the calls of there’s properties available? Are you guys out, you know, scouring the market looking for new markets and new opportunities?

Yoel Mayerfeld 28:19

Yeah, we’re always scouring the markets. But you know, fortunately, one of the one of the benefits of being around for almost 50 years and really being focused on this space is we are known as one of the largest private buyers of small smaller market retail. So we typically get that first call and certainly when something when when an asset is being marketed, or even when they’re not when when a read when a public real estate firm is looking to sell real estate in the secondary or tertiary market we’re often getting that call, but we also have our eye on assets that we would love to own for the long term and we’re letting those owners know that we’re interested should they decide to sell so we’re constantly scouring the market we look at 1000s of deals a year broadly and then you know that gets filtered to hundreds that we spend time on and then we probably go and look at 20 assets a year or so and typically transact on two to five assets a year.

J Darrin Gross 29:37

And in the market you play in Are you typically like if there’s a if you ever look at any dark properties or not but is it typically it’s it’s repurposed for retail or have you gotten in anything where you’ve seen different opportunities IE self storage or something like that I’ve heard you know others converting some of the the dark retail into You know, maybe a self storage kind of thing.

Yoel Mayerfeld 30:02

Yeah, you know, repurpose is sort of a hot topic in, in retail, particularly with malls, and we could talk about malls separately. But for our open air shopping centers, when we see, they can see that’s been vacant for a while, it’s typically vacant for a reason. Now that was different 10 years ago, 20 years ago, where there were opportunities to do something on a value add basis, because of our retail relationships and our expertise in these markets. Today, it’s it’s rare, we’ll do it we’ll look at certainly when there’s one box or two boxes, that that we can we can do something with. But when we see one of these ghost town, retail centers, it’s typically not something we’re going to want to pursue in terms of repurposing to self storage, or use like that, or even, you know, on the more expensive side, multifamily or, or industrial, you need to be able to own that asset at such a low basis, to make it make sense whether because the Self Storage rents are going to be so low, or on the multifamily side, the amount of capital or industrial, the amount of capital you’re going to need to put in is, is so extreme that it’s it’s it, it’s a lot harder than I think people think, you know, to to make that work. So so you know, if you can basically get it for free, or almost free. I think there’s a lot of interesting opportunities to debt. And people do, you know, sometimes you can buy, you know, the debt for pennies on the dollar, and you can make something like that work. But outside of that, it’s pretty difficult to make the math work.

J Darrin Gross 32:08

Right. Right. You mentioned some other assets. Do I understand correctly that you guys are also in some multifamily and industrial properties?

Yoel Mayerfeld 32:18

Yeah, we’ve been probably over the past five years, diversifying into multifamily and industrial. You know, we are still extremely bullish on retail and the retail that we like, but we’re extremely disciplined on what retail will buy. So to broaden our ability to find investments for ourselves and our investors, we’ve brought in expertise from for multifamily and industrial to help us source, similar risk reward type properties, stronger smaller markets. we’ve, we’ve bought in outside of St. Louis, we’re getting ready to do a smaller market in Florida shortly. That’s on the multifamily side industrial we’ve bought in Ohio, a few assets we’ve bought in markets outside of Orlando. So we’re building that up for those asset classes, we have not started a fund business, we are not at the point where we want to do a blind fund for our investors, where we’re buying those on a deal by deal basis. We, you know, we invest in that we go to our investors, and show them the asset and see if they’d like to participate with us. And so far, that’s been a really great expansion for us.

J Darrin Gross 33:51

In for those assets, are you entering the same kind of mindset is a forever hold? Or is that a Kennedy have an exit strategy on those?

Yoel Mayerfeld 33:59

Yeah, they really are. Forever holds, ideally. I mean, we were faced with that question on this St. Louis asset recently, where we were able to expand the project and raise rents higher than we had expected. And the there was, you know, and with cap rates in continuing to compress. It was we were faced with one of these, you know, this has been a home run, let’s take money off the table. which typically isn’t really you know, we’re not seeing that drastic of a return change within a couple years. And, you know, we knew for ourselves and our investors. Having that great asset and being able to continue cash flow on that great asset was our number one priority. So we chose to refinance, we’re still able to take out a lot of our winnings, let’s say, from the refinance, but we’re gonna be able to continue to own an asset that we love, and we think will continue to perform for the long term. So, yeah, more often than not, we’re going to we’re going to continue even on those other asset classes to own for the long term and continue good stable cash flow returns for us and our investors.

J Darrin Gross 35:27

Tad it when you speak in industrial, is there a type of industrial that you guys are into? or?

Yoel Mayerfeld 35:37

Yeah, I mean, it’s, it comes back to the fundamentals of what we like in, in retail, which is solid credit tenants are the users or a geography that’s going to demand those solid credit tenants. So you know, the, the assets we’ve bought, have ranged from a vacant truck terminal, that we were able to put a very strong credit public company tenant in for a 10 year lease, to a cold storage facility that we were able to put a very strong credit tenant food distributor in, and we’re even expanding that. That building now because the demand is so strong for high credit tenants in those areas. So I would say, choosing assets, where we know we’re gonna have demand for the from the kind of tenants that we’re going to want to work with.

J Darrin Gross 36:41

Now, that makes sense, always have no credit where the tenant is preferred is to somebody is not you? Well, if we could, I’d like to shift gears for a second. As I mentioned to you, before we started recording by day, I’m an insurance broker. And I try and work with my clients to assess risk, and determine what to do with risk. And we typically do that and in one of three ways, we look to see if we can first avoid the risk. If that’s not an option, we look to see if we can minimize the risk. And when neither of those are options, we look to see if we can transfer the risk. And that’s what an insurance policy is. I like to ask my guests if they can look at their own situation. their clients, investors, the market tenants, however you want to frame it. But if you can look at your situation, and consider what what is the biggest risk? And for clarification, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Yoel Mayerfeld, what is the BIGGEST RISK?

Yoel Mayerfeld 37:55

Sure. Well answer in a couple of ways. And risk, as I mentioned, from, you know, how I was trained in in my professional life is really what I’m always first focused on, you know, whenever we’re looking at an opportunity. I’m always spending a lot more time on what can go wrong than what can go right. Because capital preservation is our sort of number one goal. From a you know, I would I was looking at my calendar yesterday and saw that we had this podcast and Robbie, who set this up with you wrote in the notes that one question you like to ask is about risk. I should be I should be repair at night, and I happen to be talking to a friend of mine. It’s a CEO of a large real estate company public read, and I said, Oh, you know, I, I’m interested in what I’m going to say about what my largest, what I think the biggest risk in this industry is what do you think the biggest risk is? And he said, Well, for sure, the biggest risk is capital markets, freezing up, because whenever that happens, it really puts us in, in a bind. And to be able to, to borrow, which we saw, you know, certainly after the oh eight recession and during COVID. But for me, that isn’t at all, what I think has the biggest risk and I think part of that is our strategy, which one thing I didn’t get into is that we are low leverage borrowers, which I think differentiates us. So a even when capital markets are tight, for our lower loan to value needs. Usually there’s more room for us than for others. Our bankers always tell us they can sleep at night with us better than they can sleep at night with many of their other real estate borrowers. So I just thought that was interesting. I think that would be what a lot of Retail real estate or real estate investors in general would say it’s the biggest risk. But for us, we’re so focused on the real estate, and it performing with or without debt, we’re really not about the financial engineering part of real estate, which, at these low cap rates, I think every real estate investor has had to become somewhat more of a financial engineering, trade than a real estate is a real estate great trade, which is where we really try to stick with. So. So for us, that wouldn’t be it for us really on our answer on the retail side, which has been the bulk of our experience and our, in our investment. The biggest risk is the, you know, we can’t perform well, for attendance don’t perform well. So our biggest risk is, is is these retailers, not figuring it out. And and right now they’ve been, you know, our portfolio, the sales that tenants report to us are stronger than they’ve been even pre COVID. They’re figuring out their integration of bricks and mortar and online. So they’re doing that well. But the day that they don’t, the day that they they let you know, competition like Amazon, innovate quicker, you know, figure it out in a way that that puts them at a disadvantage. That’s a big risk to us, we need our our tenants to do well. So that’s on a more micro to the retail aspect for for more of a macro perspective, as real estate investors generally, which is what we are, I would say it’s the risk of the unknown. After living through COVID, you know, you mentioned insurance, you know, we have what we feel is, you know, really good insurance for our portfolio and thought of every scenario. You know, we weren’t covered for lack of rent during COVID, when your retailers couldn’t pay. So I think the unknown is the biggest risk. So the mitigant, I would say, has has been, our diverse diversification is sort of like the answer for all kinds of risk for investing. And adding multifamily and industrial was a huge help now, for COVID. Because our retailers couldn’t pay rent during COVID, because their stores were closed. Our industrial properties all paid rent, our multifamily properties all paid rent. So that diversification was huge for for during that three month period of COVID, that helped us sleep better at night.

Now, even the retail properties it was it was very temporary, and it was a stressful few months when those stores were closed, but we defer the rents for most of our retailers, because our lenders allowed us to defer our loan payments. So all worked out fine. But having that diversification was really a mitigate for, for us, globally. And then the diversification even in within our retail portfolio of mixed geographies, mixed tenants for different credits, so that when, you know, the Siena brands struggled and dress barn closed, it was such a tiny percentage of all of our tenancy that it was very easy to to move beyond that fill, fill some of those dress barns and most of our portfolio continue to thrive. So we were Okay, so the answer to mitigating some of these risks that I think about it continues to be diversification, which has really helped us.

J Darrin Gross 43:49

and I appreciate you going into that the clearly diversification makes sense. I think the thing you mentioned about the the way you structure your your deals where you’re not so heavily leveraged, I don’t think a lot of people really realize the risk that they run when they take on a you know, a greater leverage position. And, you know, hopefully it doesn’t mind people will clearly history shown if you get out there too far over your skis. The bank can call back here your note and and you don’t have the wherewithal to withstand that or the ability to to find new capital. You could be sunk. So I appreciate you sharing that. Sure. You well where can listeners go if they would like to learn more connect with you?

Yoel Mayerfeld 44:44

Sure. They can go to either our website ChaseProp.com they can email me directly which my emails ymayerfeld@chaseprop.com. Y M like Mary YE R like Roger F like Frank. E L like Larry D like David at chase prop dot com. I think one of my LinkedIn, Yoel Mayerfeld. And happy to answer any questions or talk to any of your listeners.

J Darrin Gross 45:12

Awesome. Yoel, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it and learned a lot. And hopefully we can do it again soon.

Yoel Mayerfeld 45:22

Yeah, thank you. This was great. I really had fun. I appreciate it.

J Darrin Gross 45:25

All right. For our listeners, if you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 45:44

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Commercial Real Estate Operator Risk with Mike Zlotnik – CRE PN # 302

Mike Zlotnik 0:00

I grew up being a mathematician. So we’ve looked at risk too. And I’ve learned there’s two elements to risk. Number one, it’s likelihood. Number two is impact. So what what, what I do is I look at risks and try to figure that figure that out. So likelihood and impact are the two key variables that drive all the decisions. And I would say the number one risk on a grand scale of things, and for the entire real estate market, and I think about it, it’s not necessarily my biggest fear because I feel that the the impact is huge and likelihood is low, very low. But the interest rates going up a lot.

Announcer 0:43

J Darrin Gross 1:02

Welcome to commercial real estate pro networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Mike Zlotnik. Mike is known in real estate circles is Big Mike, due to his stature. But more importantly, He is known for his personal integrity, and for having a keen understanding of the financial aspects of successful real estate investing. Mike is the CEO of TF Management Group, LLC, and is a real estate fund manager. And in just a minute, we’re going to speak with Mike about the best commercial real estate investing opportunities coming out of COVID-19.

But first, a quick reminder, if you like our show, care, pn radio, there are a couple things you can do. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Mike, welcome to CRE PN Radio.

Mike Zlotnik 2:35

And thank you very much appreciate the opportunity to join your podcast radio show. And delighted It’s a small world we chatted about this a little bit. You’re in Portland, where New York and close with some friends with folks that live in your neck of the woods. So yeah,

J Darrin Gross 2:54

and I you know, my neighbors. That’s awesome.

Mike Zlotnik 2:57

It’s kind of a small world. That’s so thank you for having me.

J Darrin Gross 3:00

Now. Glad to have you. Here. Before we get going, Mike, if you could take just a second and share with the listeners a little bit about your background.

Mike Zlotnik 3:09

Sure. So I grew up in the former Soviet Union. And but people asked me, where are you from? I call I say From Russia with love, like James Bond. Originally, actually from Moldova, not Russia, but I my native tongue is Russian immigrated from the former Soviet Union to the United States in 1989. As a political refugee, so I’m a US citizen at the end, the US patriot. And so that’s kind of the origins. I live in Brooklyn, New York, married to my lovely wife for 21 years, I have four kids, and a cat, the fifth child, those of you who have a path can appreciate what I’m talking about. And previously, I had a career almost 15 years as a software executive mathematician by education and spent years in that industry. But in 2000 I discovered real estate, made my first purchase and continued acquiring assets from there and discovered that’s the best asset class and never looked back 2009 I quit my last it job I went real estate full time starting managing my own investments as well as investor capital. And been it’s been a journey since then. And today we invest broad range of commercial and residential assets from performing to distress that from multifamily Self Storage conversion of hotels to affordable multifamily housing, industrial even cannabis farms, how about that? part farms we have debt on land. Well, not conversion, but permitting for cultivation. So it’s a strategy and pretty flexible, dynamic looking for greatest copywriters and greatest opportunities. And that’s what’s what we do.

J Darrin Gross 5:08

Awesome. Well, I I’m impressed with the kind of the width of your, your different asset classes, I think so many times I find people that are kind of, you know, they’re married to one, and we’ll write it up and write it down as opposed to recognize the opportunities that are in other asset classes. Can you speak a little bit of that how you how you are comfortable with with all the different asset classes?

Sure. So using the Wall Street term, we are allocators, the way to think about what we do is where allocators of capital into the best opportunities different during different market cycles. And so I think of myself as a diversification manager, and the capital allocator. That’s primary strategy kind of what we do, as far as building expertise in various verticals such as self storage, multifamily, industrial, as we make investments, we’ve been learning over the years, what works, what doesn’t, obviously, commercial underwriting has a lot of stuff in common. Obviously, cap rates, interest rates, sensitivity to over noi to, to the top line to the bottom line expenses, all this stuff is sort of similar in nature. But knowing a specific industry is important. And we’ve focused on picking the right sponsors. So the The game has been having a vertically integrated sponsor, so someone who does distress that in New York City, and that’s all they do. So we’ll allocate capital to that to the extent of the diversification strategy, as well as, as the deal flow gets better or worse with the market cycles. Similarly, as I mentioned, the cannabis farms, the only reason we invest with that in our industry, because we know a very competent operator, who figured it out, build the connections in Lake County, California, and they’re able to get their permits done faster than the rest of players. So that’s the way to think about this. pick the right operators, specialists, if the if there were few people that you can know, like and trust, you can execute the strategy with them. And then we have this to learn as we go, we adjust to observe. So that’s been kind of the approach. The way to think about this, everyone loves Warren Buffett, well, I don’t know if loves them, but he knows who he is. So Warren, if you read what, what, what he does, he’s only only about three things really, obviously, companies he wants to buy or what investments he wants to make, right? The dollars, he wants to put in those investments, and then the people to run them. We use the same basic methodology in the reverse order. We start with people, then we decide what dollars we can write into strategy within our diversification. And then obviously, the project so it’s projects, and then and then dollars. So as we know, we have a $2 million bucket in distressed debt. And we look for projects. And if the water projects come along, can we get it to the right economics? At the right, waterfall? There are plenty of great operators with soso deals, it has to be a great operator. great deal. And then the right, obviously, dollar amount. So I don’t think that helps, but at least that’s how I think about the whole exercise.

No, I think it definitely, you know, it clarifies it, as opposed to you know, those that are focused strictly on an asset class, you You said you start with the operator. I mean, knowing knowing that the operator but also understanding the the opportunity. And then getting into the if I understood right, getting into the the details on the project. So you have to have a good operator and a good a good project for for something, you know, for, you know, something that you would be interested in investing in if that’s kind of what I understood, right?

Yeah, exactly. So if we start with the relationship I’ll give you, I’ll give you an example. We’re working on the new opportunity, kind of while new, I mean, it’s been around that the concept is all but I go to number of masterminds, one of the masterminds I go to call the collective genius. It’s kind of very interesting, very cute name, but it’s movers and shakers in real estate. Some guys are residential. Some guys are commercial. Make long story short, I met a couple of new guys there. And their whole strategy is they buy land for cash, and then they sell it with seller financing to people who pay them on a credit card. So they’ll buy a lot for three, four or $5,000, they’ll sell it for 18 to 20,000 bucks on a payment plan 250 bucks a month for 72 months. It’s a massive receivables business. But they’re real businesses is a technology, business and marketing. But it has real estate as the product. So when I looked at this stuff, what’s really interesting is this was new. And we’ve never done anything like this. First thing we did, and you and I both know very best. So I send those guys the very best to get very verified because I have great relationship with with with very Western lens. And once they got very best verified, I knew these guys are clean, and they’re good guys, then we underwrote them, we gave them a hard money loan effectively secured by that portfolio off of all these massive receivables. So yes, the different strategies knew, but I thought it was a great deal, because they could afford to pay us better than market rates while the market is over subjective, but it’s a niche product. So the way to think about this, it’s a niche loan. And we found and we working with them, we’re working with expansion, their strategy continues to grow, we’ll continue to invest more capital with them. But this is an example of kind of discovering a sort of new to our strategy, whether the good operator, so we started with due diligence on these guys, to we gave him a small loan and they’re performing. And as they continue to grow, we’re looking to do more business with them. So the strategy is fairly straightforward. Is this a commercial real estate, in my view, it is it’s almost it’s a, this is an example of real estate mixed with a business, right, you have self storage, you have senior living, you have sell my operating businesses real estate component, but it’s all separation. And it’s critical to pick the right people who know what they’re doing. Right, I mean, we can talk about senior living, you could buy a bunch of senior living facilities, if you have a terrible operator the business falls apart, same is true with self storage, this gets a critical operating business. So

So let me ask you, I mean, knowing that the operator is the key to all of this, what are some key, you know, indicators that you look for? When when assessing a an operator.

Mike Zlotnik 12:09

So we always start with obviously, the basic background checking, I mentioned will relying now on very restaurant is for us, right? So as long as there the history is clean, or they can explain what has happened in a succinct manner, at least it’s a start to look for is well organized. documentation. They can’t can’t understate this. If they give you great documents, underlying spreadsheets, with KPIs and they know their business, you know it immediately. So in that business, one of the critical KPIs new lots acquired versus new lights sold on this financing, that tracking that they don’t have getting stuck with inventory. So getting well organized. The KPIs and data is very valuable. You get a sense whether they know their business, and how well, right. And obviously understanding how they make money, pretty obvious. Running the math. So what I do want to see is a business model that has pretty strong foundation. So risk levels. So the other thing is we’re looking at I mean, you we talk pre qual you’re, you’re the master of the risk assessment, the risk is probably one of the most fundamental things, what can go wrong with the strategy. So I looked at this, and lamp is not going to have a problem or it’s not going to depreciate, you’re not going to have buildings, it’s going to crumble, the strategy doesn’t have a lot of downside, other than these guys turning bad, and somehow disappearing with a bunch of cash, which is a risk, right? But if you can eliminate that risk, through the background check and understanding who they are and having some controls. But then have a day if the operator is high integrity, and that risk goes away. And the asset class itself works. And they don’t run into a problem with too much inventory. The business feels very solid from the investment perspective. So I would say fine, fund the fundamentals of the business, that’s the way to think about it.

J Darrin Gross 14:11

Is there any kind of a timeline of experience the look for him? I mean, all these things that you’ve mentioned, suggests that they’ve been in, you know that they’re a proven entity, is there any kind of a minimum years of experience that you would look for?

Mike Zlotnik 14:25

So that’s, that question is a part of this week. I’m not looking for somebody who’s 20 years of experience in this if they have 20 years of experience in this, they shouldn’t need my money. Right? But they just shouldn’t they should have built a great business and were bankable financeable. So these guys have a couple of years of experience to me. They have two strong years and these guys are young. So I see the path if they’re on the right trajectory. We’re catching them before they’ve gotten too big, too strong and they’re fully bankable with traditional money with a with a bank with a bank capital. So Couple of years, I would say, have general experiences sufficient. Obviously, they’ve not seen market market cycles. So what is important is more monitoring. But they’ve agreed to this. And they’re providing more reports. And they’re demonstrating what, what’s happening as long as that’s in pretty good shape. I don’t necessarily need 20 years of past experience and a resume that that has, you know, worth called in the paper. But can they still operate as he is, you know, you could have been great 10 years ago, and now things are falling apart. So let’s just call him like, you look at trailing 12. When you’re acquiring anything, that’s the key. What is the trailing? 12? The trailing 12 looks good. That’s an indication.

J Darrin Gross 15:46

Gotcha. Well, I appreciate you kind of diving into that a little bit. I think that, you know, the operator is clearly kind of the integral piece or I mean, the the kind of the tell of whether or not at least what I’ve seen, and an insurance if the, if the operator has their act together, things usually run pretty smoothly. If they’re always trying to shade things in a particular way, or make things fit in a particular way and ignoring, you know, the facts, it makes for a difficult go. And, I mean, I’m sure that’s, that kind of plays out in your business as well. Let me ask you so so, you know, in your experience with the different types of investments that you are placing in the capital that you’re placing. Right now, we’re in the middle of the covid 19 pandemic, if you were to compare your experience and what you guys were doing, pre COVID, as opposed to what you’re looking at, going forward? Can you kind of make a comparison for us based on you know, asset classes and strategies and where the opportunities are?

Mike Zlotnik 17:05

are so? Yeah, it’s a great question. I would say that the time horizon is changed when everything is running well, and we were a little bit more aggressive. In as COVID hit, it’s a wake up call. And what does it mean? It means we’re looking for strategies where we can get to the value of phase over a shorter amount of time and getting to civilization faster. Now, it’s not the only strategy will obviously invest in deals that have great fundamentals, but they take longer to execute. But in general, I would like to see faster path to cash flow, because one of the variables or uncertainties of COVID is the cash flow. If tenants are not paying, what’s the what’s a big risk? And the other adjustment is what is the risk to the cash flow related to COVID. dynamics, so specifically cannot evict cannot foreclose? Right. So we’re making loans we’re trying to be extra careful now. We’re going to have difficult time with foreclosure if is a default, obviously, picking the right operators. We can’t understate that that is the most fundamental thing. If you pick good people, you don’t have to worry about the foreclosure risk and so on. It starts with high integrity. Obviously, if you pick shysters doesn’t matter what I mean, they’re gonna figure out a way to cause grief. So I would say COVID risks obviously come into play. How is this asset specifically impacted? So multifamily investing today? Has that risk? For sure. But what asset class? They you know, is it the Class A Class B, Class C? section, section eight, one investment were made in the middle of COVID. We’re very comfortable with it. We invested with another member of the collective genius mastermind, who is I call him the biggest shark in Mobile, Alabama. So forgive me, I’m out of New York. I don’t know. I didn’t know where my bill Obama was on the map. So my ignorance, but obviously, I know now, and he was, was buying a portfolio of 93 single family residential properties. Right. So I looked at it as a commercial project. It’s basically a package and they all within 15 minutes drive from his office, and he owns hundreds and hundreds more. So you can manage the portfolio. And 90% of the portfolio was section eight, right? And so the the safety of the income stream was related to the the government payments, that’s why we invested in it’s cash flowing like a monster today. Because he bought a less than 50,000 a door and they’re, they’re renting 150 and 100 bucks a month. So from that perspective, you can get pretty good yield in a portfolio instead of multifamily go find multifamily. Yes, it’s harder, but this exercise was a precision of doing it with the right app. Raider, and in the market that case cash flowing substantially. And then obviously doing the due diligence on the project and the deal. So here’s an example of a justice strategy in the middle of COVID. The other strategy, we did make another investment in a substantial value of multifamily in Indianapolis, almost 1000 doors with a very, very competent sponsor. And we were nervous about where things gonna go. But the sponsor experience and the track record and ability to execute strategy in the rents below the market kind of helped us to clear that bridge. So if you have a very competent operator, they have a good track record of executing a similar strategy and you picking the right asset in the right location, then you can you can go with that. And the deal obviously had great economics and the right type of a waterfall and right depreciation benefits. So was it that unique thing about that deal? On top of all this, it was a value a strategy that had cash flow from day one. So if he asked me what has changed in the past, I wouldn’t care about the cash flow. Now I do, I would like to have the safety margin of some cash flow from day one as a buffer against problems. So that’s a COVID. Investing. So

J Darrin Gross 21:24

now that that makes a lot of sense. You know, and I’m just kind of curious, you know, you’ve emphasize the the quality of the the operator their experience. Is there. It sounds like you maybe answered the question with just saying the cash flow is more important now than it was historically. I know, like, I’ve heard multiple times from from investors, how the lenders are acquiring additional capital and reserves kind of thing. Is that, is that factoring in anything that you’re doing? Or when you’re underwriting deals? Are you? Are you looking for more cash, in reserve to weather any kind of storm that might still be on the horizon? or lack of income? or?

Mike Zlotnik 22:13

Yeah, for sure. So I’ve developed educational methodology called the four quadrants, a lot of people have four questions, or Robert Kiyosaki has four quadrants, I have my own four quadrants. So what I like to focus on what I call in quadrant one, and two of these are sort of investment grade quadrants, and I’m not selling this methodology. It’s simply the way to think about this is buffer reserves, though, if you if it’s an equity investment, is there substantial debt service coverage ratio, and then obviously, reserves. So the quadrant one deals are the deals that have a cash flow, have substantial reserves, healthy dscr. And a little over capitalized project, with, with extra cash always helps. Now, the bank’s requirements sometimes help, right? If the bank says, Hey, you need six months of interest reserves, and I’m keeping it well, that’s great that that, in fact, requires over capitalization because that cash has to be in the reserve account. So I don’t mind that at all. In fact, I like it. Lower leverage is one thing that I’ve looked at recently, most people want to get the higher leverage more than happy. So this trend, the aggressive operators will go to a bridge lender, and they’ll get at 85% leverage, while the conservative lender will say 70. But the effective benefit of a lower leverage is you can actually get a lower rate. So there’s two way savings. Looking at the max leverage, you know, it’s a two way sword. If things don’t go well, you can get wiped out faster. So I would say, yeah, looking for lower leverage, maybe a little bit lower target ROI, as long as the safety of the of the income is, you know, feels feels better just feels what I call the quadrant one and two deals, the speculation element is lower and it safety which can cash reserves, lower dscr simpler strategy to execute. is what I look at what I look at,

J Darrin Gross 24:18

have your time horizons changed at all as far as pre COVID. Now, I mean, I think you did hint at it. You’re looking for quicker cash, cash flow, are you even kind of said cash flow? I mean, day one is kind of what you’re looking at. Are you looking for deals to go full cycle faster? Or what is your is your expectation for a deal cycle? changed at all?

Mike Zlotnik 24:45

Yes, another great question. I would say that the path to civilization, you know, he can monster two years if you can execute that full strategy. Now if you’re innovating a lot of units, can you do it during that timeline. We haven’t talked yet. But I do like the hotel conversions to affordable multifamily. This whole strategy is pretty pretty healthy, generally extended stay hotels that are easy to convert that look like apartments, most of them can get to the stabilization point within 18 months. Now, can you enter into a similar asset class on an existing multifamily, it’s harder, because you have an asset class that’s distressed, now you can you can pick it up at a better price. And it’s an easier conversion path. So I would say that, because you gave a get through, you have an empty, empty future apartment complex. So you can execute the strategy versus you have a full apartment complex, we have to gradually do it. And I don’t mind the gradual strategy, which has better cash flow from day one. But sometimes you can go into more value add more speculative, as long as there’s a very competent operator, fairly straightforward conversion process, right. And obviously, sufficient reserves to be able to pay for the budget overruns, budget has to be conservative, too. If those elements are good, you can run into sort of value strategy faster, basically, you entering the strategy, without fear of something getting stuck, the the risks, what can go wrong. So even this project, the risks of things going wrong are lower than infest a path to a civilization. I like those projects more today. So that’s, that’s the kind of the way the view of the world what else can be done to reduce risks?

J Darrin Gross 26:38

I like that the conversion strategy, are you seeing a lot of that? And if so, are there any particular market characteristics where you see that playing out?

Mike Zlotnik 26:51

Yeah, it’s a it’s a non major MSA. Right, you could do it in New York, but I don’t know I would want to do it in New York is a massive oversupply of condos in Manhattan, why would I want to take a hotel in Manhattan and try to convert to more apartments not a good market, but if it’s a project somewhere in Midwest southeast, secondary MSA, smaller market and the key location of that property if it’s fits right into residential neighborhoods, and it’s a good location, but I do like a proximity to universities see if you have universities you could have potential for off campus student housing. So instead of paying paying on campus price, they could pay off campus have the privacy have a better living conditions and a pretty easy commute so that these are the kind of the characteristics it’s the location within the city in the town. And then obviously easy conversion you don’t have to do extended stay you could do a tour of a traditional one, but extended stays ideal kind of candidates.

J Darrin Gross 28:00

Right Well I know I’ve talked to other guys that have done that you know, he wasn’t exactly their first idea but it just it made sense. But I would think with the extended stay you’ve already got some sort of an assemblance of a kitchen in a lot of those were some of the smaller traditional motel kind of a thing you may you may not have you know a kitchen as much as you just have kind of a bathroom and some of the the you know the the capital expense required to add the kitchen I mean I guess if you buy if you buy it right and like you said if you get an if you starting with an empty property there’s not going to be any resistance to to moving through it versus a full property kind of thing but it I can see it both ways I guess

Mike Zlotnik 28:49

Exactly what you said. If an extended stay hotel has a kitchenette installed that’s a massive help right i mean saves quite a bit of money it may look a little bit you know if the hotel is not new it may look a little little age all its its antique it’s lovely to see

J Darrin Gross 29:03

the kids behind the walls I mean I guess you your guts bombing everything. Yeah, you can. You can hook up new fixtures and make it look all pretty but just the behind the walls kind of thing gets kind of expensive.

Mike Zlotnik 29:14

Yeah, that’s an ideal setup. The the secondary opportunity becomes like you mentioned hotel, it looks like a motel. These these are sort of studios. And what’s really interesting years ago when I was when I was in college, I lived off campus. This is many, many years ago, in a in a motel right next to the university, and essentially, they weren’t missing. They were missing kitchen kitchenette, but students still live there because it was better for privacy. So if you can install small kitchenette, and you can cook it works, it absolutely works. It comes down to the price folks who rent in these these type of assets are very price sensitive. The price makes a big difference. So the product has to be extremely common. petitive

J Darrin Gross 30:02

gotcha. You mentioned some of the asset classes you had touched on storage, or self storage. Are there other asset classes that you see are are potential opportunities coming out of COVID.

Mike Zlotnik 30:19

Office conversion to multifamily. Pretty obvious that some office buildings are dysfunctional as well, at least they’re not, you know, they’ve lost at least some number of tenants. And it’s a good conversion consideration if it’s got the right location. So I would say, that’s all local mean, if you find the right asset, if the conversion path is cost effective, I think there is an opportunity there also is a lot of retail space that needs another home, for sure. So the classic big box retail conversions to self storage, that strategy has been around for a number of years, it may still make sense in some markets. The cities don’t want it anymore. But it is a creative repositioning of, or retail into some housing, which is said it’s hard to play. It’s not designed for that, but it’s a possibility people can potentially find, you know, economically feasible projects. And then the rest is really our world is very opportunistic with people we know, it’s like it’s not a necessarily a massive opportunity in a given sector. It’s more that I like the the cannabis play, with the land conversion to land permitting for cultivation, if you’re in the right market, the whole country seems to recognize that and it’s no longer taboo, it’s very friendly topic. Like that strategy. I mentioned to you some of the newer things we’ve been doing with land kind of interesting play if you if you can buy the right at the right price. The reason I say that, because it’s it’s really marketing and technology business, getting to the sellers, and getting them to sell you the land is a skill. And if it’s the right operators, you may be able to make money in that field. That strategy has been around so people have done this for years, and it comes around in cycles again. And if you buy it right, almost hard to go wrong. infill, obviously. So getting back to the land there. This continues to be interesting strategies in cities, if you find the right type of location, and you can redevelop or develop ground up for affordable. I have a I have a friend who he’s a pastor. He’s a pastor in Los Angeles. And he his strategy is pretty interesting. He goes around the city and finds other churches that have land that they’re not using. And he basically offers them to develop the land into affordable multifamily housing. And he figures out the economics. And generally the churches, kind of like they do now is this post pandemic pre pandemic. He had the strategy before before COVID. But now it’s even more relevant again, housing seems to be the need for affordable housing is accelerating. So that’s kind of what what I see today.

J Darrin Gross 33:27

And that’s that’s, I know, here in Berlin, we’ve certainly got our share of housing issues. Let me ask is there a particular size of range? Or can you identify what what’s a range of opportunity for you as far as dollar size?

Mike Zlotnik 33:48

Sure. So we are relatively small, I mean, institutional players who write bigger checks. But today for us, the sweet spot that we write today is between half a million to a million dollar project. There’s no right or wrong, we can write a bigger check. We’ve done projects we’ve written bigger checks. that give you example, the project we we did that in Indianapolis that the big 90, almost 1000 doors, were over a $3 million check. And we sold off the rest through a sub syndication we had we spun out a separate deal. The deal was just so good. We couldn’t pass it. So we wrote it a bigger check. And it helped negotiate the terms, obviously. So we’re open to the idea to write a big check, from a diversification perspective would probably want to have less exposure than then I’m out. So today, as I mentioned, half a million to a million. We’re writing some bigger checks. But what’s the sweet spot today? No, we were pretty pretty happy to take a piece. We this hotel conversions, very few are leveraged. And you’re all in 6 million bucks, your four and a half million debt debt one and a half million dollar equity. We happiness. It’s almost perfect match for us. We’ll take a good chunk of it, if not all of it. So that’s kind of the way to think about small hotels, just kind of that whole space whether your equity raise anywhere between, you know, from, let’s say half a million to 5 million, this is where we are we happy to participate

J Darrin Gross 35:18

in Do you, do you like coming in on the equity side? Or do you like doing the lending or both? Are you? You agreeable?

Mike Zlotnik 35:28

Yeah. So, we actually we execute the strategy as we have a few funds. So the the tempo Growth Fund is a growth fund, it basically takes growth positions generally. So it’s equity. Typically, temp Opportunity Fund is more of an income and Growth Fund. So we like as much as we can to take that position. We’ll take that with an equity kicker if possible, or, you know, primary debt or mass debt. But we need that because the fund has more of an income focus for tempo Growth Fund, it doesn’t care. As long as the risk adjusted return is healthy. It’s fairly flexible either way. So there is no right or wrong. It really depends on the project. The again, the cannabis farms, the pot farms, that’s what I call them the the land conversion, the owner is not willing to give enough equity on the project. So he’s perfectly happy. We’ll record firstly mortgage and have hard money terms on that, then we have an equity kicker. It worked for the sponsor, it’s really negotiation, right? That depends on what you can work out to the right sponsor, and what are your kind of risk adjusted return dynamics

J Darrin Gross 36:31

Got it. Hey, Mike, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker, and work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we look to see if first we can avoid the risk. If we’re not able to avoid it, then we look to see if there’s a way to minimize the risk. And if we can’t avoid nor minimize the risk, then we look to transfer the risk. And that’s what an insurance policy is. I like to ask my guests if they can look at their own situation, your your business, your clients, investors, the market, however you want to identify. But if you can take a look in and at your situation, and identify what you consider to be the biggest risk. And for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Mike Zlotnick, what is the BIGGEST RISK?

Mike Zlotnik 37:40

So great there. And thanks for that. Three, three ways to manage to kind of risk avoided. mitigate it and obviously transferred. I when I grew up being a mathematician, so we’ve looked at risk too. And I’ve learned there’s two elements to risk. Number one, it’s likelihood. Number two is impact. So what what I do is I look at risks and try to figure that figure that out. So likelihood, and impact are the two key variables that drive all the decisions. And I would say the number one risk on a grand scale of things, and for the entire real estate market. And I think about it, it’s not necessarily my biggest fear, because I feel that the the impact is huge, and likelihood is low, very low. But the interest rates going up a lot. So take a look at what has happened to the 30 year bond, where we are recording this February 10. I don’t know when it’s gonna come out, maybe it’s live. But I looked at the data since the beginning of the year, and the 10 year Treasury and in a 30 year Treasury moved quite a bit. The yields have gone on on a 10. year from from point 94, up to 118. If I if I’m committed fluctuating obviously on on a 30 year from 1.66 to 1.9697 in that range. And these are very substantial moves. If you’re a bond investor, you lost 20, maybe even more percent of your investment in 30 days. This is how sensitive this stuff is. And the whole real estate industry is heavily dependent on low interest rates. It’s like a fuel when the rates drop, it’s a fuel for real estate fire. When the rates climb, cost of capital goes up cap rates go up now. This is directional moves. But what the United States is doing, they’re printing huge amount of debt basically borrowing and spending the money for the stimulus and everything else. So our debt to GDP ratio is getting out of control. Nothing new here, right? We’ve known about this, but it’s getting progressively worse, it’s that the risk is accelerating. So there’s only one solution, unfortunately, that we’ve seen it in the world out there to Japan model there is going to go negative. Now, as crazy as it sounds, it’s the opposite of the risk that I’m talking about. So the rates go negative probably will be pretty good for a lot of real estate investors, as the cost of capital will drop. But there’s also a possibility of effectively runaway inflation, as the government continues to spend without the brakes, unless fat comes in, that’s basically manipulation of rates, that the Fed has unlimited checkbook, and they can buy all the bonds that are issued by the Treasury and push other rates down. But at that point, what do we have, we have a central bank that buys everything, just to get the rates to the point where they can service the debt on, you know, one, the liabilities of the United States government, unfunded liabilities plus the real debt. So the problem is, this could turn into a runaway hyperinflation. And the rates will actually jump substantially. And it happens, it will be essentially devaluation, massive devaluation of the dollar. And it can happen, I’ve seen other countries do this. So your strategy of artificially keep the rates lower and lower and lower. It works until it doesn’t. And if it doesn’t, that becomes a cliff. And that cliff triggers hyper inflation. And it could cause substantial grief on the on the older all the lines, everything rolling the debt service, it’ll be massive squeeze, because of the debt to GDP ratio is so out of control, that if rates climb, we have a massive collapse of the of the of the over oversized debt portfolio, the whole the whole national debt plus all the private debt. So it’s a possibility to risk, what can you do about it? It’s hard, it’s hard to come up with a great strategy, obviously. likelihood is, is pretty low, I do think that the Fed will not let that happen. In the long run, it’s just they can’t, I mean, we’re gonna have a bigger crisis, a different type of crisis than we’re dealing with now.

You could, you could sort of play some, some derivatives to protect yourself, you can build in if you’re, if you’re if you’re an expert trader, you could hedge against that. But in the short run, I would essentially caution people who don’t think the rates can go up, they actually can, and they are showing some movement today.

J Darrin Gross 42:57

Now, I appreciate you, you know, getting into that. It’s, it is something that I think I’m I’m aware of, but like you said, not much I can do about it, but more I guess, you know, be aware of it. And and I would assume is a defensive strategy is is not being over leveraged, you know, or keeping a higher degree of, of, you know, cash in the deal kind of thing as opposed to, like you say, going all the way in on on debt.

Mike Zlotnik 43:30

Well, that’s right, it’s a sensitivity study theory to fly up fast. These assets will be selling at higher cap rates. So just doing some analysis, on sensitivity study, as a sponsor, what you can do is assume, hey, the pro forma sale price is based on a six cap, right? What happens is seven, can you can you still survive? It’s exactly lower leverage. So be more conservative in your investing decisions, and have more cash, the solution when the rates go up, and you got to refi. And the cost of debt is going up is to bring more equity. So not a very popular exercise, but it’s an option, can you deal with that type of situation? We haven’t seen this in a longest time. And honestly, you’re asking about a risk, it’s a risk likelihood, I think it’s slow given where the world has gone. And we’ve seen examples of Japan is a classic model because their debt to GDP ratio is worse than ours. And they’ve had no choice but to go there. So I think us is more likely, from a likelihood perspective, that scenario is a higher likelihood than the scenario of a hyperinflation and the rates getting out of control, you know, on the on the higher side. So both scenarios present different types of risk and different type of problem but As an investor, you have to be sort of prepared and please think about what would happen in either one.

J Darrin Gross 45:09

Well, hey, Mike, I want to say thanks for taking the time to talk today. I’ve, I’ve enjoyed our talk, learned a lot. And hope we can do it again soon.

Mike Zlotnik 45:19

Darrin, Thank you kindly. I very much appreciate have been a guest on the on the show

J Darrin Gross 45:26

Before I forget, Mike, I apologize. I meant to ask you, where can listeners go if they’d like to learn more connect with you?

Mike Zlotnik 45:33

Sure. So it’s a little cheesy, but it’s a personal brand. It’s just people, this whole Big Mike. It came as a suggestion from my mastermind guys in the collective Shinya. They said you’re a big guy here, six, four, and a heavy set. So Big Mike Fund. So Big Mike fund.com is the way to find me. And if you misspell it, and you forget to do it on the backhand, you type Big Mike fun. com, I promise. It’s not a kinky site.

J Darrin Gross 46:05

That’s hilarious. All right, well, hey Mike again, thanks for taking the time today. And for our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks, CRE PN Radio

Announcer 46:27

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Self Directed IRA Invests In Commercial Real Estate with Glen Mather – CREPN #268

Glen Mather 0:00

People are drawn to us that have unshakable belief in themselves. And if you think of a group of three, you wouldn’t want an airline pilot that’s insecure and not sure. Now, it doesn’t make them any necessarily an investor’s, but they believe they are. And, you know, they have the confidence. So those kind of people are drawn to us. But, you know, there’s lots of people that have those same psychographics that don’t have those qualifications. They’re also drawn to us. And what’s neat is, is they talk amongst themselves We do lots of events and we now we’re doing them of course remotely with COVID. But, but it gives them more confidence once they say yeah, you can do this. This is how you do it. And there’s a powerful component about this Darrin, which I love, is the fact that you can partner your IRAs

Intro 0:47

Welcome to CREPN Radio, for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast. Whether you’re an investor, broker, lender, property manager, attorney or accountant. We are here to learn from the experts.

J Darrin Gross 1:06

Welcome to Commercial Real Estate Pro Networks CREPN Radio. Thanks for joining us. My name is J Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today my guest is Glen Mather. Glen is the founder of NuView IRA and has been its leader since 2003. In 2018, he also created NuView Trust, expanding the growing business of self directed IRAs into new services to further reduce and eliminate taxes. In just a minute, we’re going to speak with Glenn about how you can use a self directed IRA and a little bit about the difference between a custodian and a fiduciary. And, but before we bring Glenn in, I’d like to remind you, if you like our show CREPN Radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we love to hear from our listeners, please consider leaving a comment. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And I also would like to encourage you to subscribe there as well. With that, I’d like to welcome my guest, Glenn, welcome to CREPN Radio.

Glen Mather 2:51

Thanks Darrin. It is intimidating that you have a handsome test on your guests but I hope I am able to survive that.

J Darrin Gross 3:00

I think you’re gonna do just fine here where we’re in good shape. Glenn, before we get started here, if you could take just a minute and share with the listeners a little bit about your background.

Glen Mather 3:11

Yeah, it’s kind of interesting because it may not be much different than a lot of your listeners. I came out of college and and I got a job at a little company on the West Coast called Lockheed Missiles and Space Company. I worked there 13 years. One of the first things that I did in 1980, when I started was I got enrolled in their 401k program. And that was interesting. It was Northern California, expensive as heck to live. But I kind of talked myself into putting 2% in. It’s a great way to say, by the way is to promise in the future to do something and rather than doing it at the time, but I said to 2% and what I’m going to do is every time I get a pay raise or bonus, maybe I was too optimistic, but I was assuming that one would come, I’d put 50% more into my 401k After I left Lockheed 13 years later, I had a I had a massed what I thought was a lot of money about $125,000 completely painless, through the 401k program. So I understood the power of payroll deduction, because you don’t miss it. And best of all, your spouse never sees it. So through that process, I was able to do that. As I went on, and I became a strategy consultant, I was traveling a lot and I read about in the paper about the fact that you could actually take your IRA and invest in real estate. That thrilled me because I felt like I didn’t have a chance in real estate or in the equity markets. And in real estate, I’d had some small successes, I didn’t have a lot of money. My largest amount of money was in my 401k, which had rolled over and became an IRA. This is traditional for most Americans, most Americans wealth, at least their cash or disposable wealth is in their retirement plans. And so I just felt like real estate was my best option. I looked around Chicago for weeks to find someone that would do it. And I finally snuck into that process through the wealth department of of a bank in Chicago. And that bank did it as a favor. I didn’t deserve there. I didn’t have enough money. But because I knew some, some people in the company they allowed me in. And so for $2,000, I bought my first piece of real estate. That was their fees to do it. In my IRA, that was about 23 years ago, and that was my first inkling you could do it. I watched that double in price. It was a place in South Carolina in a in a gated community. It was just a lot. And I realized later on in my life. I had moved to Florida, and I decided to start my own business. I had read about this in the paper about a company that did it. So I opened up an affiliate of Entrust back in 2003. I knew nothing about the business except the fact that I was passionate about it myself and I figured other people would feel the same way. Most the people I’ve talked to over the years didn’t really know it. They still don’t know it today and how it works. It’s been transformative, not just for our clients, but from my own retirement. Because I have the enviable position, Darrin, of being able to learn how to invest through my clients. Because as a self directed administrator, custodian, I don’t direct our clients to do anything. I don’t sell anything. So it’s a safe place. It’s a Switzerland of investing, safe place to go. Our clients choose our clients direct. And it’s been an amazing, amazing ride for us. And we now have about $1.3 billion of client assets that are sitting on our platform. More than half of it is in real estate today.

J Darrin Gross 6:52

Wow. That definitely, percentage wise speaks to the attraction and the power of real estate. You mentioned custodian, and I was hoping we could we could take a little bit of time and just differentiate between the custodian role versus the fiduciary role, and how that different or how that is different from the traditional role of like, you know, a typical advisor, a financial advisor Now, can you do that?

Glen Mather 7:28

Well, sure, a financial advisor, according to the rules right now is that they they are acting in a fiduciary role generally. And what that means is they’re not just selling you something, they’re selling you something appropriate to your particular financial situation, age, etc. So as you can imagine, that means that you have to spend a lot of time with each investor to understand them. The processes are longer and the fees are pretty high because it has to represent the getting to know and potentially even the legal risk that the financial planner and advisor may be under. That is one type of investment and and they’re making it advices. And perhaps the older you are, they would put you in something with less risk or maybe generate more cash flow. It may be contrary to the desire of the of the individual doing the investing, but they still kind of have to follow along with that path based on industry standards. So that’s what you’re going to get is you’re going to get investments based on industry standards. A custodian has a different role a custodian Think of it as your church custodian or your school’s custodian. Their job is to take care of something that doesn’t belong to them. So in essence, as a your custodian at NuView, we take care of your money in the sense that we we place it wherever you direct it to be when it’s not directed. We maintain it. We Have to control control it, we put it in a bank that where it’s going to be safe, and we wait for your investment decisions and we direct those funds based on your investment decisions. The reason why Darrin, you need a custodian is you have to have one with an IRA. So in other words, there’s no there’s not a chance for you to opt out. You have to have a custodian. And so what what you’re looking for is a custodian that serves your needs, whether it’s education, certainly good record, keeping in administration or reporting to the IRS, and stability has been in the business a long period of time.

J Darrin Gross 9:36

Gotcha. And I think, correct me if I’m wrong, but the the, the opportunity for investments, the custodian, you have kind of the wide range, I mean, it’s like you said wherever the investor chooses to go, with just a few limitations. Were as a fiduciary, the traditional investment advisor is going to lean more towards the the non alternative investments Is that fair to say?

Glen Mather 10:07

I think in almost all cases, they’ll be it provided, what you’re looking for is legal shelter, if you’re a fiduciary, and the further you get away from the normal types of investments, the more you’re perceived or actually placed at risk. If things go badly, and investments, things can go badly, whether you self direct, or you’re certainly in the traditional markets, they can go badly.

J Darrin Gross 10:35

Because I was saying, I don’t think I’ve ever come across or talked with or met a, an investment advisor that even recognizes or or would encourage somebody to consider an alternative investment is that have you found anybody like that?

Glen Mather 10:54

Well, in a perverse way I have, they don’t recommend it to their clients, but guess what they do themselves.

J Darrin Gross 10:59

They do it. Gotcha. No, the the IRA, or so that. Are you saying that you found people that are doing their self directing their own IRA or is theirs? They’re acting as a financial advisor for others?

Glen Mather 11:14

Yes, very much so. And because they understand the limitations of what the traditional markets give, and they want exposure to other markets mean that the thing is it’s not choosing all it can be choose partial, you can have as many IRAs as you lie. So if you if you want to be with Charles Schwab or Fidelity, Fidelity is actually the largest IRA holder in the country, you can. But you can take if you want to invest in startups, for example, you can take 10, 15 20% of your portfolio, move it to self direction, go do it that way. If you want exposure to commercial real estate, you can take a piece over. I think the irony is, is we watch the money come and go so so we have lots of accounts that are just fractional. In other words, people have money other places, we don’t always Know that necessarily, we would have to be involved in the transfer the funds, but we see where the funds go and self direction is a very healthy narcotic, you basically want to do more and more of it and have less and less direction from other people that are charging commissions, etc for it. Because you simply measure, it’s the freedom, right how you feel about your investments, sometimes it’s just as valuable as the return you get. And so how you feel about your own ability and knowledge. That’s one of the reasons that that they’re going to watch and listen to your podcast. It gives people knowledge to act, and it’s not after the first session or the second session, but all of a sudden, you’re around a group of community of people just like your listeners and viewers. It makes them more confident in their own choices. And usually that lack of confidence is just lack of education.

J Darrin Gross 12:52

So I’m wondering, can you identify what a typical client of NuView can you kind of give a scenario who describe the average person that that kind of NuView.

Glen Mather 13:10

Okay, I’ll do that understand that I’m missing most of them when I do that, because it’s going to be a vanilla person. But I will tell you that within our our portfolio here or our group that is on our platform, the average person owns a little less than two assets. So whether it’s to apartment buildings, whether it’s to single family homes, whether it’s to loans, whether it’s to silver and gold and precious metals, they own two assets. This is the average so that’s what I’m giving you the average person is aged 50 to about 60%, male 40% female and the they have $150,000 or so self directed That’s the average. We have. We have three and four year old babies, toddlers that have IRAs with us. And I think our oldest client is 99. I don’t know if it makes you older or I mean, it makes you live longer. I think it live makes you live without less stress when you’re older, maybe it does make you live longer. So, we have many clients, I would say that probably I haven’t even looked at this, but I would guess it maybe 20% of our clients are in the retirement years and about 80% are still building towards them.

There’s a certain psychographics Darrin I mean, the psychographics think about this in it’s it’s really strange, but it plays out because one of the questions that we’re, we’re required to ask actually an IRA applications a strange one, but I have I’m supposed to know your profession. So we start to gather that data and look at it and we end up with a tremendous amount of attorneys, an airline pilots and doctors. So I’m thinking well, that’s good, you know? They’re well heeled, they have a lot of money. But it’s really the psychographics. The people are drawn to us that have unshakable belief in themselves. And if you think of a group of three, you wouldn’t want an airline pilot that’s insecure and not sure. Now, it doesn’t make them any necessarily and investors, but they believe they are. And, you know, they have the confidence. So those kind of people are drawn to us. But, you know, there’s lots of people that have those same psychographics that don’t have those qualifications. They’re also drawn to us. And what’s neat is, is they talk amongst themselves, we do lots of events, and we now we’re doing them, of course remotely with COVID. But, but it gives them more confidence. Once they say, yeah, you can do this, this is how you do it. And there’s a powerful component about this Darrin, which I love, is the fact that you can partner your IRAs, and I love doing this because why would you ever want to go out on your first venture alone when you could partner 50/50 with someone you get 50 percent of the reward by making 50% of the investment, and you get 100% of the brain and knowledge from your partner. I do this all the time I sell them on my own until I really feel good about the asset class. And then I go off on my own. And also by doing this, you get the phone calls, and you get the recept people saying, Hey, would you like to come in on me with this, would you like to do this, and it may be $10,000, it may be $100,000. But in any case, I get a percentage ownership of a pair pursue what I put in. So that’s a great way to learn through doing and not wait until you have all the knowledge to get comfortable.

J Darrin Gross 16:39

That’s a great point because I think that one of the thoughts I had had with with specifically real estate and that was more than that, that people were buying like a something in total. Whether it be a lot or a single family rental or or You know, something controlling it, solely. But as you mentioned me, one of the powers of real estate is that, you know, if you can, you know, you can either leverage or or pool with others so that you can control a bigger asset. That’s, that’s definitely one of the, the attractions.

Glen Mather 17:23

I think it’s one of the it’s one of the practical ways to invest in commercial simply because of the size, you don’t find commercial opportunities at $10,000 slices, you know, so there’s ways that you can get in and get exposure to a particular asset class without risking making a big risk first time out.

J Darrin Gross 17:45

So when people come to you, do they typically have an investment they want to participate in, in mind, or is it more of just the concept of I want to be able to direct my money?

Glen Mather 17:56

Wow. Darrin, you just asked one of the most important question questions that we struggle with and deal with as a custodian, which is I really wish it was the second part of this, which is, people need to understand the power of this and why they should get an account even before because it’s in essence, what happens is people usually do the opposite, which is exactly that they, they find out that they might be able to use their IRA sometimes even after they locate the investment. Here’s the problem with that, first of all, well, the problem is it gates the number of clients that were able to serve because they don’t come until, they have an impetus. Maybe they meet you, maybe they find out a syndication you’re doing or one of your one of your listeners are doing and that’s what caused them come. Here’s the problem. A lot of times in real estate, things come with a clock attached to it or a calendar attached to it, right, they have to be done within a certain period of time. So what we’ve seen many times is people will actually open an account to make an investment, but they’re out there. Going administrator that’s holding on to their money really tight like it’s their own won’t, won’t move it over quick. There is, by the way, there is no federal guideline or federal law that says that a custodian or an IRA administrator must move the funds over within a period of time. I’ve seen them held on to six weeks, really that because they want the asset counted on their platform, there may be some sort of bonus attached to it. And it’s a crime because they view that since my my clients leaving me, I’m going to punish them on the way out, I don’t care how I treat them. I mean, in our company, we don’t do that we pass everything out within within seven working days without question, but not everybody does that. So what happens is, is the fact that they may lose that investment, because of timing. That’s the one reason that I would suggest the other thing is, is of course they get to be part of the community and get to learn a lot more about this through a lot of session, a lot of education that we do, I would like it to be the fact but the fact right now is the greatest impetus is when you have to buy that forces people to get their act together and move those move from a traditional custodian to NuView.

J Darrin Gross 20:16

So, let me ask you just in the the mechanics of the the shifting from the traditional fiduciary investment advisor to working with NuView. If I like to do that in my current investments or in Mutual’s that are that are you know, common, Mutual’s they’re not like ones that are unique to a particular brokerage, right. Can I not move those in, in the vessel they’re in to you or do I have to liquidate those to get them into my self directed IRA?

Glen Mather 20:53

Well, there’s a practical answer to that. And there’s one that we can do. Certainly I think most custodians would rather, unless you’re on a on a stock, you have a stock trading platform, which we’ll have in about six months. We don’t have it right now. I would suggest you liquidate it. Bring it over. We have, we have a relationship with Ameritrade now, where that account can actually be opened under ours. You we can actually do the transfer with Ameritrade. But it’s uglier and it takes longer. So I would just suggest if you’re if your trading costs aren’t that high, and we’d even probably pay them for you. So it’s not it’s not like it has to the money has to do with that, you know, you won’t be exposed for the market for those days that you’ve moving it from one platform to our platform. The reason that you’d want it on our platform potentially is this. If you want to be able to dictate to ameritrade sell it and move the money over to new view in an expeditious, expeditious manner. We can cause that to really happen because we’ll have a relationship with NuView because it’ll be or with Ameritrade because it’s our umbrella over the top of it. That’s what makes it valuable. However, this may also get to a point of you have so much money that you want to expose to self direction, so much money in the market, just leave that alone. You know, if you like the way it’s working, just leave it alone, and just move over the amount that you want to invest. So there’s there’s choices, whichever way you want to do it, you can do it.

J Darrin Gross 22:24

I would think that would be a big win for you guys to have that additional option available just from a standpoint of his people age and you have to take your minimum distributions and trying to sort through everything and the sale of certain assets, and especially if you’re in real estate, trying to time that. Does that. Does that kind of make it? I mean, I think there’s a there’s a little bit of strategy that needs to be involved in order to work within the guidelines. Is that fair?

Glen Mather 22:57

I think it is fair, I mean, RMD’s are real required minimum distributions. As you may be aware, the Cares Act actually shifted the age it used to be 70 and a half, it’s now 72. And if this is for all investments that were made pre tax, so if you got the tax benefit upfront, unlike a Roth, then your start to force to take minimum distributions, and it’s relatively small, like 2% of starts 2%, at age 72. What that what you’re pointing towards that is you need to have a liquidity, right? You need to have cash in your account. If you’re 100% invested in real estate that is not producing cash, then you’re going to be in trouble. Now rmds can come from any IRA you have, so they don’t have to come from your self directed part. You could always sell stock if you had more assets on the other side. That’s one of the reasons that an IRA requires you to have a declaration of value every year because as you get older is for two purposes. The Treasury wants to forecast how much tax you’re going to get out of you. Even if you’re 30 They need to forecast out to when you’re 72. And in some sort of growth manner on that. So, yes, you do need a philosophy or strategy to make sure that you’re investing in things that are in cash, probably by the time you’re 72, it is a good idea that you have part of your portfolio generating cash, you probably shouldn’t be 100% speculative when you’re 72. So you just need to make sure that you have enough cash generated so that you can make those minimum distributions that are required.

J Darrin Gross 24:32

Right, no and again, it’s it’s, I feel like I’m kind of one of the slow skis and remember, there was a, some sort of an ad for the internet there, but that’s typically the way I learned it seems like I’m in the slow lane a lot of times on this stuff. But the just the realization of that there are these RMD’s you have to have in the mechanics of the how you get your money out. I think that’s one of the things I’m becoming more and more aware of is how much of our time is spent on how to grow something or invest in something or you know, to make it bigger and bigger and bigger irrespective or without any thought on how do you get the money out of the vehicle or you know, what’s involved on the back end kind of thing. And, you know, the RMD’s are clearly something that’s, that’s kind of something you have to pay attention to them. So

Glen Mather 25:21

Well, you call yourself a slow ski, I appreciate that. Because you’re all you’re communicating to me and I, I learned slowly so that’s, that’s a plus. You know, and what happens is as we get older, and I won’t ask you your age, because you’re not a client yet, but I’ll no one should become a client. But in any case, bait as we age, we do become naturally concerned about cash flow. I think it’s, you know, it’s like because we take a look at our end of our traditional work, whatever that might look like and you say, Okay, how am I going to fund the rest of my life will it be a drop off and I want to touch on this for just a minute if you’ll give me some airtime, because it, it really bothers me how traditional Investment Advisors look at you and your retirement. They look at you and your retirement. So your job is to amass and save, and we’re going to invest it alongside and maybe it’s an average, if you look at the stock market’s an average of 6%, you plug it in. And I’m not suggesting it’s not a good long term investment, I think it is, but it’s just one type. But what they do is they say your job is to pile up money. And if you’re a professional, maybe you need $3 million. Right? And based on maybe you’ll retire at 67, we’re also tend to be a little bit older now. So what we do is we take a look at that money, we take a look at your lifestyle needs and whatever else you’ve invested in, and let’s say you have to draw down 40,000 the first year or 45,000, nothing to do with the RMD’s just what you need to live on. And what they do is they basically watch that pile go down, and then there’s a safety piece that says maybe there’ll be half a million dollars left when you die. I think to myself, are you kidding me? Is that how is that how that yes, that’s how America plans.

What I want to do is when I die, I want to have more assets than I ever had before the day that I die, not less. Because you don’t have to do that with self direction. You don’t have to do that with real proper real estate investments. You don’t have to do this. So you won’t be searching for an annuity that pays you one and a half percent when you’re 70. Because you’re scared to death about losing your money. So that’s so basically have no more earnings, you’re basically got distributions with a little bit of frosting on top. That’s not what I want. Because I want to be able to pass this on to my children to charities, I want to pass on to my children, not just the equity, but understanding how equities work and how they build. And that’s the beauty and I think that’s what you do whether you’re inside an IRA or you’re outside an IRA. That’s what your goal should be. It should not be that you continue to have to sell off all your good stock to live on it and all of a sudden you have less of what was really good. I would suggest that you could have more that’s really good and it’s not. It takes a little bit more work. Yes. And it takes you stepping out of line with different advisors and different people by listening to podcasts like this. It can inspire you because we needed inspiration to move, but we need education to move smartly. And I and I, I see all of this available. I see what my clients are doing. And it’s stunning. One guy came over about nine years ago, he told me a story came over with 90,000 or $70,000. He had lost it. Almost all of it in the 2006 2007 crash. And he now has 1.3 million just by moves he’s made primarily real estate moves. And now is is getting bigger. What happens is you don’t have to make as big a bet you can lend money so he’s lending part of it. So he’s taking part of the risk off the shelf and doing it other ways. That’s the power of self direction. That’s the power of educating paying yourself by the way, a lot of people pay 1% of their asset fee to their financial planner. I would suggest you pay 1% a year on going to webinars and seminars and learning more and buying books and learning from masters. And now it’s all you’ll you’ll own all the knowledge asset and you won’t pay anything more for it.

J Darrin Gross 29:21

No, I appreciate you going into that because that that is one of the I guess the the concept that I grabbed hold of when I first understood investing in the stock market and I think it came from a place where dividend stocks were kind of you know, presented to me and that’s what I understood. I remember my dad talking now you invest in the company they pay a dividend and that was just that concept of that the the nest egg was still there working and producing. But since then, I think the the stock market I don’t have a ton in the market but it’s pretty much A very speculative thing, it’s about, you know, you’re hoping that you’re going to buy something for less today than somebody else would be willing to pay for it tomorrow, without any distribution of any cash without, you know, unless you sell. And it’s, I, it did not occur to me until, you know, more recently here where I’ve had to get kind of more involved with my mother’s finances and stuff and just become aware of just how the mechanics like you talked about. And, you know, the basically the financial advisors, you know, the map is, you know, well, you, your life expectancy is here, you know, yeah, you won’t outlive your money. That’s basically the that’s, that’s the summary there. I thought, wow. Not exactly the plan I had I was I was expecting to have, like you said a bigger pile of money then than ever before and something that was thrown off cash and, and could continue to work. So I like that. So Want to ask you? So the cost of you mentioned like the 1% is what? You know, I don’t know if it’s a 1% or whatever, there’s usually a percentage. Now everybody’s going into this assets under management kind of pricing model. How, what are the fees, the pricing for doing a self directed IRA?

Glen Mather 31:25

Well, there’s two elements of it. One is deciding to do it. And the second is what you’re actually buying and holding inside it. But But our fees are very simple. Our fees have not changed, I think in seven and a half years. And the way it works is $50. To open your account, it’s $95 to make your first investment, so let’s assume that you’re maybe in a syndication, real estate syndication and you’re putting $50,000 into a strip mall somewhere that would cost you $95 in it and then 295 a year to hold it. And with that, Do you get, you’re going to get our full custodian, our record keeping our tracking or reporting to the IRS. And also access to all of our events, which is probably just are more valuable than doing the accounting and the record keeping for your IRA. It gives you the ability to buy and sell on your portal or on your on your phone, you can actually buy a piece of real estate on your phone. So it’s very quick and basically get you in the game. What’s nice is that cost does not increase when your asset value increases. So don’t worry about what watch it go up and enjoy it. Your fees don’t go up, they stay the same. So it’s a relatively small price to pay for freedom. And that’s what what is freedom of choice. You’re making the choice. You’re doing the hard lifting, we’re not. But we are providing all of the tools, the techniques and the platform for you to make these choices.

J Darrin Gross 32:55

No, it’s great. I want to ask you You know, we’re in the middle of this COVID-19 thing. I’m curious, have you seen a change in the way people are viewing the self directed IRA or is it brought more opportunities to you? Has it made people rethink?

Glen Mather 33:21

Any disruption in the market is good for us. I mean, it’s it’s really strange, bad news is good for us. And, and although it’s not good for us individually, it’s good for us as company, you know, you know, all the way from running our company. I mean, we, we are fortunately designated as as required or necessary or what was the word they used? Very important workers that could continue working. And, and so, we’ve not we’ve not stopped at all working from a perspective of watching what our investors do, there was probably a two week period where there’s a run on cash, meaning people drawing down. And the Cares Act actually included a provision that said that you can take IRAs out without penalty as long as you pay them back in within three years. And so I expected all of that to be draining. It wasn’t significant at all. And but we thought there was there has been a pause on investments. The challenge here isn’t so much. It’s just figuring people figuring out where to go next. You know, there’s a period of indecision. So it’s unlike any other kind of market downturn. Typically market downturns come with clear winners and losers, right? And, you know, obviously in real estate, you can clean up right after that, that trough You know, a lot of people did in 06 & 07 and have been sort of buying it up and we’ve seen prices prices going up. We haven’t seen prices decline, certainly in Florida and probably probably about 40% of our clients are in Florida, but many pockets of the US. It’s been Because the government dumped in so much money. So they’ve artificially stimulated pricing. So what do you do as an investment, I expect people to scratch their heads a bit and kind of figure it out. We’ve seen, we’ve seen Wall Street bigger money from Wall Street in the private investment side moving towards those things that tend not to get hurt. So we’ve seen apartment complexes being extremely strong, because it’s first tier housing. You know, it’s where people have to go. We’ve seen things like storage facilities, any disruption where people are moving storage facilities get full. So they like those kind of investments, office buildings, you know, we’re not sure what this is going to do. People are working out of their own home, what types of office buildings are structures, we’ve seen really good move up in investment in in storage, commercial storage, and anything that has to do with moving and transporting, especially foods. That’s been excellent, cold storage and everything has been very, very strong. So what’s happening is individual investors have to find this because Don’t forget, that’s what we are. We’re we’re a group of individual investors. So as they find it, that’s the doors that I seem to be opening and people are investing more and then maybe the traditional vanilla stuff that, that as the traditional markets were moving up before this disruption they, they felt good about. So we’ve seen that the the, what I’m really proud of from an individual standpoint is people are contributing to their IRAs and 401k’s now, that’s great to see. That means they feel better about it. They haven’t stopped their contributions. And they’ve stopped taking out more than just their RMD’s that are required. They’re required minimum distributions so that I think it’s caused a pause in fairness, it’s caused a pause to think about what are those things that are going to do well in a sideways market? A choppy market that we’re really not sure that maybe based on when we find a cure, you know, that may be the thing. I just think that I can’t believe that when they find a cure, there’s not going to be like all sorts of craziness going on the market. Yeah, there will be so much coming into the alternative space. That that’s going to be amazing. And I think we’re gonna see that’s going to be where inflation is going to start to crop its head. When everybody feels like we’re back to square one, we can now grow. There’s going to be such a pent up demand for so many things that I think that’s when it’s come. But until until that until we get the cure, or some sort of ways to deal with COVID-19 I think things are still going to be uncertain in many ways.

J Darrin Gross 37:47

Yeah, no, I think uncertainty is kind of the theme. I’m convinced now that whatever opinions I hear just that there’s no nobody has a crystal ball. We’ve not been here. You know, So, take it all in and try and process it and just kind of keep, keep listening and paying attention to the, you know, what’s going on there. But definitely interesting times, that’s for sure.

Glenn, if we could, I’d like to shift gears here for a second. As I mentioned to you before we started recording by day, I’m an insurance broker. And I work with real estate clients to assess risk and determine what to do with risk. And we typically look at one of three strategies we look and see can we avoid the risk? If we can’t avoid it, we look to see if we can minimize the risk. And then if we can’t minimize it, we look to see if we could transfer the risk. And that’s what an insurance policy is risk transfer measure. And I like to ask my CREPN Radio guest if they can look at their business and their clients and identify what you consider to be the BIGGEST RISK. And for clarity, I just wanna make sure you understand I’m not necessarily looking for a, an insurance related answer. But with that, if you’re willing, I’d like to ask you, Glen Mather, what is the BIGGEST RISK?

Glen Mather 39:19

is this? Are you asking us for my clients and self directing?

J Darrin Gross 39:23

Yep, I’m gonna let you define it for you to kind of, however the BIGGEST RISK, you see, what would you see that is, if it’s a client’s that’s, that’s great.

Glen Mather 39:33

I think when you go well, with any kind of investment, you kind of have two choices. You can invest based on the recommendation of others, or you can invest based on your own knowledge. And certainly, maybe alongside recommendations for others where you can actually do your own due diligence on the process. That’s what self direction is all about. And if you just get tagged if you’re just coming along and doing an alt with a recommend from somebody else, that you don’t really know the basis of it, then you might as well be in the stock market. It’s no different. I think the the risks, the risks are no greater or less, it’s when what you’re doing is you’re mitigating some of those risks, as you said, or lessening some of those risks through your own knowledge. And, you know, I’ve certainly heard that Warren Buffett say several times about he won’t invest in any business he doesn’t understand and I take that to heart is I don’t invest in anything and I get some pretty creative things that are thrown at me. And I just recall something if I can tell a brief story, there’s a new freeway that’s going around Orlando, on the on the west side of Orlando, and it’s it just completed almost all of its stops. And, but when you when you build a ring around the city, you generally go through wilderness, right? There’s nothing there yet. The freeway effect which we learned in LA right, which is you put a freeway houses are going to come When you own the land around interchange, it’s valuable beyond belief, right? So I had I invested in something like this similar that worked out and then the guy told me, he said, I got another interchange, I go great. Bring it in and show it to me. You know, and by the way, it’s only for me, it’s not for my clients, I don’t share it with my clients. And he talked about how he has a land option is going through this company and then you taking that you’re splitting the depreciation off and you’re moving it to a third company. And then there’s a developer who gets 15% of the back end load. My head was about to split. You talk about being the slow guy in the room I was I couldn’t get it and I I stopped it after about 30 minutes of trying to sketch it out on a pad and I said I can’t invest in it. You guys got a phenomenal track record. All I’d be doing is throwing you money and I trusting you and I don’t want to do that I promised I’m not going to do that my with my IRA and or my any over my retirement. So that’s been my mantra, the less I know, the more I’ll go to partnering until I know, without a lot of money, so, so my risk is mitigated by the fact that generally on my investments until I get to an educated state, is that I’m in it with you. If and if I’m in it with you, Darrin, I suggest that you’re probably pretty interested in your money and your segment, you’re going to make sure it’s as good as your education. So that’s kind of as close as I get to risk is, I may look at a deal. I’ll educate as much as I can, and then I’ll go in at 20% with Darrin. And if Darrin is screwed me is screwed himself 80% you know, and you’re not going to do that. So I think it’s a pretty fair and easy way to learn and to reduce the risk. But make no mistake, it’s on you. No one else is making these selections. It’s on you. So that’s where the risk lies. And and I don’t think that you should be somebody anyone should be scared. Do it with their retirement plan and be Cavalier enough to shove it to somebody else and say go manage it for me. We’re in it’s stunning because I talk to well educated people. And they’re very quick to wave off and say, I don’t know anything about investing. I make 600,000 a year but I don’t know about investing. So I have my buddy take care of it. I just like it. It shocks me.

J Darrin Gross 43:26

Yeah, no, it’s there’s a lot of opportunists out there and and you know, if you’re not someone, yeah, I mean, guarded defensive of your, what you created, you can end up with, you know, nothing. So, I appreciate that.

Glen Mather 43:47

We would all like to think that there actually is a green path that you have to follow like Fidelity says and, you know, you have the happy couple who look like you know, they’re retiring very young and they Walk down hand in hand in this path and it just kind of rolls out in front of them. I mean, you talk about fiction. I mean, that’s completely fiction. The only they don’t show you that that Green Path actually stops before you do not right. Right. That’s the problem.

J Darrin Gross 44:18

Not good. Hey, Glenn, before we wrap up, Where can the listeners go? If they would like to learn more connect with you?

Glen Mather 44:26

Yeah, I think the best place to start is is where our website is, and but I don’t want you to end it that way. And, and, you know, one of the things that we that we pride ourselves in that is that we answer 98% or more of our calls with a live knowledgeable person. So do call in, but certainly to whet your appetite to learn more, go to NuViewTrust.com and it’s spelled misspelled NuViewTrust.com. Go there and it’ll kind of teach you we deal with very special money managers. And we also deal with individuals just like you and just like me, who are just trying to get started and understand it. There’s videos, there’s podcasts, if you don’t mind, we’ll put this podcast up so that people can find us that way too. And it’s a great way to kind of understand it and and maybe you can even learn from some of our clients that have their success stories up and what they’ve done to change their retirement too. So it’s NuViewTrust.com.

J Darrin Gross 45:27

Got it. We’ll have it in the show notes. Glenn, I want to say thanks for taking the time today. I’ve enjoyed speaking with you learned a lot and hope we can do it again soon.

Glen Mather 45:39

I appreciate the opportunity. Thanks so much.

J Darrin Gross 45:42

All right. For our listeners. If you like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks CREPN Radio,

Intro 46:02

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio.

Real Estate Syndication with Gene Trowbridge – CREPN #246

Today my guest is Gene Trowbridge is a commercial real estate broker, CCIM, syndicator. An author, he wrote the book, it’s a whole new business. He’s a speaker, a real estate attorney, and a founding partner at the corporate securities law firm Trowbridge, Sidoti LLP, and an expert in real estate syndication. And in just a minute, we’re going to speak with Jean about syndication law, and the issues with regulation, the private placement. But first, a quick reminder, if you like the show, CR e pn radio, please let us know you can like, share and subscribe. And as always, you can leave a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And that’s commercial real estate pro network. With that, I want to Welcome my guest, Jean, welcome to see our CREPN Radio.

Gene Trowbridge 1:05

Thanks, Darrin. I’m happy to be here.

J Darrin Gross 1:08

I’m so glad you were able to join us today. And before we jump into our conversation, if you could take just a minute, and share with the listeners a little bit about your background.

Gene Trowbridge 1:21

All right, well, I really had three, three careers. And that that’s amazing given I’m only 27. But I’ve had death. Three careers. I had a career as a commercial real estate broker. I had a career as a real estate syndicator, where I put together syndications, concentrating primarily and building self storage facilities here in Southern California. And then when I was 45, I went to law school. And my third career now is being an attorney. And my practice is really specialized in commercial real estate securities. And that would be my third career. And I’m still working on my fourth one. I’m going to keep that a secret.

J Darrin Gross 2:10

Oh, yeah. Got a surprise. Is it gonna? Is it something real estate related?

Gene Trowbridge 2:15

You know, I don’t even know. So it’s a secret to me but you know it’s

it’s a it’s it’s it’s a

it’s a shame if you don’t try new things once in a while.

J Darrin Gross 2:25

I love it. A seeker constantly seeking good stuff. Gene I’m just curious based on your experience, and you know, having been a broker and also a syndicator. And now, being a part of a law firm that specializes in syndications. have you kept count, you have any sense of how many syndications you’ve you’ve been a part of in one way or another?

Gene Trowbridge 2:56

Totally No, but Since 2014, since the the formation of this law firm, we do keep track of that. And we have about all 550 clients, individual clients, we have almost 900 offerings. And we’re over the $4 billion mark in dollars raised in our offerings, not the value of the real estate, but the dollars raised. So for a bowtique firm, right now, we have five attorneys. That’s a pretty strong, pretty strong record.

J Darrin Gross 3:42

Definitely does sound like you’re just trying to figure it out. We’ve kind of worked out some of the kinks, I suppose. Hmm.

Gene Trowbridge 3:48

Yeah, that’s right.

J Darrin Gross 3:49

So for the uninitiated, could you define for us what syndication is

Gene Trowbridge 3:57

sure.

That’s Very good question because that’s one of the most common questions I get someone’s calls me in the off on the phone and says Jean, I want to put four or five people together, we want to buy a piece of real estate, but I don’t want it to be a syndication.

Well, that’s the wrong question.

A syndication is anytime two or more people combine their money and their expertise to do something. Some of the examples of syndication that you see are when you go to the movies. At the beginning of the movie, it probably talks about three or four different companies who have come come together to make the movie. I talk about

insurance.

long term health care insurance for an old guy like me, that’s really a syndication. We all pool our small amounts of money and then the big pile of money will take care of us hopefully. Other syndications are when you fly an airplane, you don’t have a plane. You don’t have that. management expertise, you 140 of your best friends climb into the, what I call the flying petri dish. And, and fly somewhere. That’s a syndication. So simply, a syndication is when you and other investors get together to buy some real estate. Now, that’s not a legal entity. That’s not an anything. It’s just a definition. The real question is, is it a security? That’s the issue because when people say I don’t want to do a syndication, they’re asking the wrong question. They’re using the wrong language. They’re saying, I want to put these people together and buy something, but I don’t want it to be a security. Because with the security, you work, you walk into a whole different world. And you know, that’s the title of my book. It’s a Whole New Business. The securities world is totally different than the real estate world. Okay, it’s different. So that’s That’s my long winded answer to that question, Darrin?

J Darrin Gross 6:03

No, it’s a it’s a perfect starting point, I think for today. And you mentioned that it’s not an entity, but it’s more of a kind of a coming together. And actually, it’s a security to that kind of the distinction as opposed

Gene Trowbridge 6:18

to syndication. And the question is, Is someone going to manage the money? For the other people? Are there going to be passive investors? And in there, is there going to be an active investor. So the government has an interest in protecting these passive investors. So the government long time ago set rules that apply to the syndicator, who’s going to take the money from the passives and run it I mean, the definition of a security Darren is if there’s an investment of money in a common enterprise, the investors expect to profit what’s Someone else is doing the work. So you’ve got passive investors, and you’ve got the syndicator. And there’s a reason for the government to regulate what the syndicator does to protect the passive investors. So you can have a, you can have a group who come together in a syndication three or four people and go out and buy something. And they all decide that they will all be active managers, and that they will all vote unanimously on the big decisions. And I’d call that a member managed something or other probably an LLC. And if it’s just member managed, then one of the four parts of the definition falls apart. The fourth prong is managed by someone else, what’s not managed by someone else, it’s managed by them. So there’s no one in charge of the passage money. In fact, there are no past All the investors are active. So that’s not a security and we don’t need to regulate that. But the minute they put Darrin Gross in charge of the money,

it’s a security. Right.

J Darrin Gross 8:14

Gotcha. I appreciate you making that distinction, because I think sometimes people, you know, speak of more like a joint venture or some sort of little partnership where there’s, you know, the, everybody’s active, like you said, and just the distinction there seems too straightforward.

Gene Trowbridge 8:31

Well, that’s the hot topic, one of the hot topics today, and I’ve heard some united troll alive lot of podcasts and I listen to a lot of other people’s podcasts. And I always hear this well, gee, you can do a joint venture and you don’t need to make it a syndication. Well, once again, that’s the wrong use of the word. A joint venture would be two people or three people or a number of people getting together to do something. Well, that in itself is indication, but a joint Venture isn’t a legal entity. It’s just an explanation of how people are coming together, you drive downtown, and you see a big hole in the ground downtown and you see a fence all around it. And you see First National Bank is providing the construction financing. Some big companies is funding the permanent financing. And ABC contracting company is doing the building the contracting company as the bulldozers, the permanent financing as the permanent financing and First National Bank as the construction lending expertise, and they call it a joint venture.

Well, that’s not how it’s owned.

It’s probably owned in a general partnership. There’s no entity. There’s nothing in a joint venture that takes title. That’s just a description of how the people who take title aren’t coming together to do the work and if it’s a true joint venture Everyone is making all the decisions are made unanimously. Okay, you could say it’s a joint venture, but if it’s actually an LLC with 10 people, then you’re managing member. It’s a security.

J Darrin Gross 10:16

So, I mean, it becomes a I think at some point, just physically impossible for the like said everybody coming to the same decision and stuff as a matter of just efficiency and moving forward. Just as a matter of if you have more than X number of people, I would think that, you know, syndication would be the natural way just based on just efficiency that not

Gene Trowbridge 10:39

Well, that’s right. For the last podcast, I heard the first question that was presented to the attorney like me who is speaking is how many people does it take before you haven’t syndication? Well, wrong question. The answers two.

That wasn’t the answer that was given, but that’s the answer. It’s two. And then the question is, well, how many new people would have to take before it becomes a security and and you hit it right on the head. I don’t know how you’re making, how will you make a decision? How many people is too many to have unanimous votes on decisions, and the minute one person takes control. Let’s say we put together an LLC and the members can vote on all the day to day stuff, and it’s all unanimous voting, but gene Trowbridge can make a decision when you sell the property, or gene Trowbridge can make a decision when you refinance the property. You’ve got yourself a security

J Darrin Gross 11:37

Got it. That the decision making and like I said, the somebody else’s trusting or that I am placing my money with you and I’m trusting and have an expectation of some sort of economic gain.

Gene Trowbridge 11:54

Well, yes in the world in the law and securities without getting too deep as it is If gene Trowbridge is a sponsor, Gene Trowbridge has to give all the investors all the material information they need to make an informed decision before they vote. And that’s a securities law issue.

Full disclosure.

And so that’s to protect the investors. Right? Then there are other rules in the securities, which, you know, maybe we go into or maybe not, how much money can be raised, how many investors can there be? And all those are ways that the federal government is regulating risk.

You know, if we say that there can only be so many people in a deal well, there, that’s their attempt to regulate risk. Right? If we say there can be as many people in the deal as you want, they’re probably going to come back and say, well, that’s going to be people who come who are smart, and who are rich, who can make their own decision and maybe we don’t need to predict them.

J Darrin Gross 12:59

Okay. Right. So, just for clarity here that so you stated that the syndication is not an entity itself, is that correct?

Gene Trowbridge 13:09

No, because the syndication could be, it could be today almost everything is a limited liability company. It could be a limited partnership. It could be a corporation. You know, Google, everything on the New York Stock exchange’s is a syndication Tesla’s a syndication Tesla with their thousand dollar a share stock Can you believe it? Is is a syndication the legal entity isn’t the issue. The issue is is the investor investing money expecting to make a profit and someone else is running it? Got it. And and again just Is it the syndication is the you know, what it represents? Is it more of like a definition of how the entity is operating or Really a definition that two or more people are combining their management expertise and their money. Okay, that’s what it is. And then the question is, what entity if there is going to be an entity and you could have, you could have a syndication with two individuals taking title, individually tenant in common. Okay, you’re gonna buy 50% with your money and I’m gonna buy 50% with my money. We’re tenants in common as individuals, we own the property. That’s the ownership entity tenant in common.

That’s a syndication.

And more than likely, that’s not a security with just two of us. But the five of us do it somewhere along the line, someone’s going to start making decisions and write in a raise it to us and security.

J Darrin Gross 14:46

Right. I know there’s different versions of syndications. And I believe, is this all under the regulation D is that where the syndication Law?

Gene Trowbridge 15:00

Regulation D. That’s an important I’m glad you brought that up when they wrote the syndication rules and the syndication rules we work under now really come from 1933 in 1934 and have changed. But over time of the syndication and the securities laws have matured to where there’s really a dichotomy.

Does the syndication law need to be applied to protect those people who are rich and smart? Does it need to be applied to protect people who aren’t rich and smart? And the answer keeps coming down to we don’t need laws to protect the rich and smart people for the most part, but we do need laws to protect those who aren’t rich and smart and a 1981. regulation D that had been around for a long time, was really modified and codified to say that in a private placement, you can have as many rich and smart people as you want. And then they applied the accredited investor definition to rich and smart.

But you can only have 35 non rich and smart people, call them sophisticated. And that’s to limit the risk. How many people can lose their money in this deal? How many people who aren’t rich and smart 35

And you can’t advertise? So 1981 that was the big, the big rule. And I said this dichotomy keeps going. The jobs act that came out in 2012 2013 really said okay, there’s a lot of rich and smart people who will We’ll never know about Gene Trowbridge his offerings, BECAUSE Gene doesn’t know them.

Why not?

why shouldn’t they know about Gene’s offerings? And there are a lot of rich and smart people that Gene doesn’t know.

Why not.

So let’s let Gene advertised all the rich and smart people there are. And let’s let all the rich and smart people find out about Gene’s offerings, and why would you do that to promote capital formation. And so they came out with 506 C, which simply was, hey, the rich and smart people all along, haven’t needed our protection. We’re going to expand it. And we’re going to let gene build the database of rich and smart people that he might not know and try to sell them, his offerings. And then rich and smart people can go online when they can Moment night and have a glass of a port and smoke a cigar and search the web for offerings offered by people like Jean and see if there’s something they want to invest in. So that’s been the trend is moving away from protection for the rich and smart people, but beefing up the protection from thought for those who aren’t.

J Darrin Gross 18:24

Got it. So in going back to essentially 81 kind of the rules there was that when the relationship was critical to this, and in order to participate, you there had to be a relationship or does that.

Gene Trowbridge 18:41

That still is that still is the case. And I’m going to I’m going to explain it like this. If the SEC came to you and said, you know, you were advertising, weren’t you? You were advertising you were soliciting when you took those people in and That’s a problem because if you’re going to do that you can only have accredited investors. And you have to have some third party verification of your advertising. And you say, No, I’m not advertising. This is family and friends and bla bla bla bla bla.

Your defense against advertising is number one, you had a pre existing relationship with the investor. And number two simultaneously, you had a substantive relationship with that investor. Those words go together pre existing and substitute. So in order to defend yourself against a claim of advertising, you have to be able to show that all your investors had a relationship with you before your offering came out. My firm The date is when you sign the fee agreement with me to do your offering. I think I think up to that point, you really don’t know what you’re doing, you might have a letter of intent. You’re just negotiating. You might even have a purchase and sale agreement. You might be wholesaling. You might be buying it yourself. I don’t know. But when you hire me to do your offering documents, I think it’s pretty clear cut, you’re looking to do an offering. And at that time, if you would, your database kind of freezes. Everyone who’s in your database up to that time would be pre existing.

Now, the question is, are they pre existing and substantive? Or did you just download some, some list of data, you know, I love that now that’s okay. If they’re all accredited. If they’re all accredited and you go do an advertising a 506 C, you can sell to people you don’t know you don’t need a pre existing relationship. You don’t need a substitute relationship. All you need to do is have some third party verification that the people you’re taking are granted. Yeah.

J Darrin Gross 21:09

So substantive. Is there any kind of a timeline or a knowledge base? Or is there a measure for defining that?

Gene Trowbridge 21:18

No. You’d think wouldn’t it be nice if we had four bullet points, but but we don’t. And over the years, there have been things called no action letters that the SEC issues when people want to define substitutive. And they’ve never really done it. The broad definition is, you as the syndicator know enough about the investor to know if the risk in the offering is something that they can handle and through their education, and their advisors, they can make a determination for themselves, that it’s okay and at the same time, the investor knows It’s enough about you to want to know about your offerings and hear about it, and go ahead and invest. That’s, that’s about it. There’s no bright line on that. I’m sure if I looked it up, I could read you the definition. I don’t have it right here. But that’s, that’s my plain English definition.

J Darrin Gross 22:18

Gotcha. So basically we’ve got a coming together of, of like minded known people or accredited people looking for, to to profit, your investment. It as far as the the, the benefits, I guess, of syndication is basically a means of raising capital so we can all do something greater than we could. On our own is that

Gene Trowbridge 22:53

Well, if you think about the examples of syndication I gave it gave it the beginning. If Just one person was going to make the movie. Or if you had a single passage xenos home movies. Yeah. So it really doesn’t work. But I think the reason, Darrin is that the investor public as a whole, for the most part doesn’t have enough money to buy a piece of real estate themselves doesn’t have the education and the training to understand a real estate investment by themselves doesn’t have the time and energy to do the management. And if we put a syndication together, we provide all those things for an investor, combine their their money, provide them professional management, and professional property management things that they couldn’t do.

So that’s why that’s what you’re looking for in your syndication if you’re going to be a syndication investor. A lot of people who say, my broker, friends, my real estate, commercial broker, friends say, well, I’ve had a lot of clients over the years, and I’ve bought a lot of properties. I think I’m going to do some syndication. And a lot of that fails, because the people who have the money and the time and the energy will continue to stick with their own property. But how many people is that? You know, there’s, there’s huge I, I think I think I saw somewhere along the line that they’re 38 or 40,000 accredited investor households in the United States. And a lot of them don’t want to buy real estate, but they’d love to invest in yours because the friends own real estate and their friends have made a lot of money in real estate. So they probably know you.

There’s all sorts of people Darrin that you know, who you’ve never asked to invest with you, who would love to invest with you You just never asked them. Right. My best story is Dan, the dry cleaner man. And for years I went in to see to Dan and today’s so does my dry cleaning. My girls had their first jobs with him. It was just amazing. And here I am a big money raiser big syndicator. In one day, he asked me what I did. Shame on me. And I told him that I was putting together syndications to buy us selves to build self storage in Southern California. And he said, Well, is that something I can invest in? Okay, so my job as a syndicator is to build my database of investors. And he asks me, okay, right. I said, Sure. You can. So he he threw $300,000 at a deal.

He did that 10 times.

J Darrin Gross 25:55

It’s pretty good dry cleaning business.

Gene Trowbridge 25:56

Pretty good dry cleaning business, but because I didn’t know That he inherited 36 dry cleaning companies when his dad died, and the only reason I knew him is the one that was close to my house was close to his house. And that’s where he came every day. But I never asked, okay, and so here’s someone who is too busy to buy real estate, had some money, didn’t know who to trust, didn’t know what to do. And that’s what the syndicators job is gotten from those people and give them the opportunity you don’t sell a syndication to someone, you give someone the opportunity to invest with you.

J Darrin Gross 26:38

Appreciate you, you know, making the distinction of what the job is, you know, finding the the potential investors and in fact, I wonder if you could take a minute and just define who the members of the syndication are the person that’s leading the or the call them the sponsor or the general partner or how do you need to find them?

Gene Trowbridge 27:00

If it’s an LLC, we have members members invest their money in the LLC that buys the property is the borrower. But someone needs to run that LLC. So we have a managing member. In my world, the managing member is also an LLC, made up of more than one person. So we have continuity. Because we need to make sure that, you know if there’s 3430 or 40 investors in the deal, we need to make sure that the member the managing member is always there. A single member LLC Upon the death of them of that member dissolves. Now who’s going to run? Who’s going to run all this? What’s the bank and say, we recently in the company had a situation where a fella was 56 years old, and he came to us and he wanted to do a big mobile home park development in Louisiana. Anna, and I said we’ve got to find you got to find a second person.

So someone in his office who was in his late 20s became a 10%. Owner in the manager LLC. Two years later, the 56 year old guy’s dead. Who would have thought, that pneumonia and died in four weeks? Oh,

What do you do? Well, luckily, we’ve got the 10% owner who just picks up and goes right to work. We don’t have to go out to the investors and figure out which one do you want to run this and all that we just we just carry on. So the lender is interested in continuity, your investors are interested in continuity.

J Darrin Gross 28:49

Know that continuity is definitely what keeps it going. Right.

Gene Trowbridge 28:54

Well, really, I think that that an investor should ask these four questions of a syndicator. And then the syndicator should have an answer. So this these questions go out to everyone. The first, the first question is, Darren, if I invest with you, what happens if something happens to you? And, Darrin, if you can answer that question, you’re not going to get my money. Period. Okay. So there’s the continuity, so we can solve that.

The second question and investors should ask is Darrin, have you done this before?

And I will tell you, Darrin, that every single one of us has had to say no, to that question the first time. So you got to go out and get your first deal done. And hopefully you’ve had some real estate experience that is maybe different than syndication. No, I haven’t done syndication but I’ve owned five properties myself, and I’m a CCI I am and I got an MBA and construction management or whatever it is, you know, You have to overcome that question,or they’re not going to give you their money.

The third question and investors should ask is, if this deal is so good, Darrin, are you going to invest any money in it? The old skin in the game question there.

And get Yeah, that’s where all the money is made is from the investors. So you should have some money. A lot of the deals we’re doing today, the minimum investment is 50, or $100,000. And I don’t suggest that the sponsor the syndicator, invest 50 or 100, in every deal, because pretty soon you run out of money. I think that you should invest something. And as core kind of a marketing issue is how much is enough? If it’s 100,000, minimum, and you can put in 40, does that satisfy the investors? I don’t know. You have to ask the investors. So that’s the third question. And then the fourth question is comes from the investor The investor says, well, Darrin, what happens if something happens to me?

Is this liquid? What’s the plan?

How do I get my money out of it? And that answer is, well, we have a well developed, drafted operating agreement that gives you the rules, and I’d be glad to have you look at it. And we take care of all the different ways that can happen. And I think you’ll be satisfied.

J Darrin Gross 31:29

I appreciate you sharing those. I was gonna ask you if we didn’t cover it. Before the end. They’re just kind of some questions that should be asked when somebody is considering getting into syndication. And those all definitely seemed like some primary points of concern and the answer should be available or near.

Gene Trowbridge 31:49

Darrin, I asked, I asked my clients those question if a first time client calls me, says they want to do a deal. They want to do a syndication. I’m gonna ask them those questions. If I were an investor and I had these four questions, how would you answer them? But the best thing I do is when the passive investor who’s invested in and literally that happens 25 30 other deals that other people have run, making a lot of money. They come to me and say, Gene, I want to be a syndicator. My best question is why?

Why would you want to do that? Being a passive investor is working for you. Why would you want to take on the issue of, of being a syndicator we have to have a heart to heart talk there in somewhere, we’ll probably talk about risk right? And we need to we need to talk about that because this is not a risk free, nothing down. Job.

This is a tough job.

J Darrin Gross 32:56

Want to ask you a little bit about the general partnership and raising money. Because I think I think one of the things I saw on one of your online, there was a video I think I saw you put together a while back. And it was speaking about this notion of the general partner and raising money and who can be on the general partnership and and in that, can you speak a little bit to that as far as

Gene Trowbridge 33:28

Sure. Let’s, let’s use the analogy to start with. For Sale By Owner. Okay. From the real estate world. The real estate world has licensing of people. You can sell your own property without a real estate license. But you can’t sell mine unless you have a real estate license. Bring that analogy right over to the securities world where there’s a licensing format. You can sell your own security.

But you can’t sell mine.

I can sell the securities I issue, but I can’t sell yours. And it’s called the issuer exemption. It’s not the for sale by owner exemption in the securities world. If you’re the issuer, you can sell the securities. So where do the issuers sit, they sit inside the managing member LLC. Members of the managing member LLC are issuers and they can sell the securities you’re offering.

Anyone outside of that group would need a securities license to sell those securities. And one of the things we see in the world today is syndicators and people are on the podium. Talking to big groups of people violate that rule all the time by saying or anyone in the audience who wants to put together a group of investors and come in and invest in my deal. And I’ll pay you a commission. That’s just totally illegal. Because the SEC would say, Well, if you’re selling someone else’s security, you better have a securities license. You don’t, you’re an unregistered securities broker. And there’s huge penalties for that. So you don’t want to, you don’t want to do that. One last thing about this Darren is inside the managing member group. Even though you’re issuers and even though you can sell the securities, you can not get paid a commission.

In order to collect a commission, you have to have a securities license.

You don’t have to have a securities license to be an issuer and sell your own stock, your own shares your own interest. But you can’t have anyone in there paid commission. There are a lot of ways we can compensate them. We can share all sorts of fees and everything, but it can’t be tied to what you raise $500,000 therefore you get x can’t do that.

J Darrin Gross 36:18

Gotcha.

Gene Trowbridge 36:19

That’s news to a lot of people who are going to be listening to this.

J Darrin Gross 36:23

Now I and I swear that, you know, I, I, I hear kind of what you hinted at some of the notions of, you know, yeah, raise some money for me, you you should do it, you know, right. And when you get into the details, so I don’t know, and I haven’t pressed on it, but I know I’ve been, I’ve been asked a number of times, yeah, you should raise some money for us. And the, you know, sometimes it seems kind of fast and loose. And, you know,

Gene Trowbridge 36:55

Tell you how you can do it. Put together your own offering of investors Bring them together in your own LLC. Have your own operating agreement. It’s your own securities offering. And then that LLC goes into Jean Trowbridge is LLC. As an investor. That works, you’re your own issuer. Okay? You can bring your own people together. And let’s say it’s Darrin Gross fund one.

After you raise that money, you can come in and invest in Trowbridge equity group, fund one. When the end of the year comes, I give you a K1. You go to your accountant and they break all that down into individual k ones for all your investors. And I give you a check. You put it in the bank, and then you write individual checks for all your investors. That works. You’re the issuer of your own securities, and we actually do quite a few projects. We’ll be four or five a year of something I would call a fund of funds, where someone comes to us and they syndicate money to invest in other people’s funds example. There are a couple big funds out there that have a million dollar minimum for an individual investment investor, and everyone has to be accredited. Well, not everyone has a million dollars.

But if you put together a fund and let’s say you raise $5 million $200,000 at a time, from accredited investors, you could take a share of this million dollar big fund. And you could take a share of this other million dollar big Fund and the people who invest with you who could never get into those funds, take advantage of pooling their resources and then diversifying into those into those big funds. We call that a fund to funds and totally, totally legal and totally done.

J Darrin Gross 39:06

Right? And then that point you’re, you’re following the rules and you’re, you’re structured properly and and you basically have capital, meaning if you’re raising the capital and you can deploy it and participate in these, these other investment opportunities is, are you would you essentially become in, if the Darrin Gross fund was participating with the Gene Trowbridge fund would that be would would I be or my fund be a limited partner in yours? Or would it come in as a general or as

Gene Trowbridge 39:37

You’d come in as a member? Yeah, I don’t want you in my managing member entity because that puts risk on you.

J Darrin Gross 39:48

Right?

Gene Trowbridge 39:49

We don’t want the risk. We just want to you just want we just want your money, right? We don’t want you to share in management and sharing our risk .

J Darrin Gross 39:59

Right? Right. No, it’s again, I appreciate you kind of distinguishing that because it’s, it’s always seems a little bit fast and loose. And I’ve gotten into a few of these conversations.

Gene Trowbridge 40:10

But the things I see that are wrong in the marketplace today is, people saying you can do joint ventures and it’s not a security. I think they’re loose with those facts. So you have to look at that. People saying you can raise money for me, and I’ll pay for you pay you for that. I think that is that is fast and loose. And another one we haven’t talked about, which is maybe too deep is something called a side letter, where you take 20 investors in under a certain set of rules. And I take Darrin in, and I say no matter what I’m doing for the other investors, I’m going to pay you twice as much of a yield.

Okay, well, that’s okay. But I better tell all the other investors

J Darrin Gross 41:00

Right,

Gene Trowbridge 41:00

You know, because you know, all the material facts has to be disclosed, or sometimes Darrin’s going to come in with a big amount of money. And Darrin is going to want more access to the books and the records and the decision making than the other members. So we better tell the other members that because maybe what’s in the best interest of Darrin isn’t in the best interest of the other members, and maybe we should all be alerted to that something that could happen.

J Darrin Gross 41:32

Yep, full disclosure, and that is, right.

Hey, we’ve been talking a lot about kind of the, the come together of a syndication and essentially to buy a property or invest in property and, and, you know, once it’s acquired, it’s operated and, and assumably. The property is profitable, and there’s distributions and and those all follow per the operating agreement. Everybody’s going to be paid. Can you talk a little bit about the liquidation and how a syndication treats it and if there’s any kind of an opportunity to take advantage of like a 1031 exchange or, or you know what the options are there.

Gene Trowbridge 42:20

So we’ve owned this property and we’ve gone full cycle and now it’s time to do something. Okay? There’s there’s going to be a capital event happening. And one of the capital events could be a refinance.

So what we do is we put a new loan on the property, generate new cash and give it back to the investors. That’s the return of their capital. The property’s gone up in value. They have equity, we refinance it, give them their money back and continue to own that property. Sometimes we take the money that we earned from the refinance and go out and buy another property. Now we own two properties. So there’s a lot of situations that are possible in a refinance.

The other thing, of course, is just the sale, we sell the property. We pay off all the debt and there’s all that money sitting there in the bank. We’re giving people their equity back. So it’s a return of capital. We pay them all off and they go away. The Smart syndicator has another offering ready at that time, Darren, we’re gonna sell this property you’re 100,000 is now 300,000. And by the time we get the sale or that ready, I’m going to have a new offering and I’d like to have you consider investing some of your money in that. That’s what the smart investment smart syndicator does.

And then the exchange. Okay. The LLC that owns the property Darrin has a deed to that property. The exchange rules simply say, you can exchange your deed and the equity represented by your deed for another deed on another property, moving your equity without it being diluted by income taxes reporting game. Okay, so we have this property, we took our $500,000 investment it’s worth, we now have a million and a half, we can take that million and a half and go over and buy a $5 million property. The LLC itself is the LLC that buys. Nothing changes.

The money just transfers, simple. Just like you doing an exchange on your own property. You own it in your name. You sell it, the money goes to the account. After you buy another property in your name, it’s a 1031 exchange. Same thing. LLC buys on the property. The issue becomes when someone wants out.

J Darrin Gross 45:14

I was gonna ask.

Gene Trowbridge 45:16

That that’s smooth, but the problem is, the first deal was 10 years ago. And now I’m 72 I don’t want to get in another 10 year deal. I want my money. Okay. So how it’s very simple what you do, you survey your investors, and you know, what your investors want to do, how many are going to go with you in the same LLC? How many are going to want their money? So what you do is in the escrow instructions, at the time of the sale, you set up two escrows one escrow is for the money that needs to go to Gene Trowbridge because Gene is going to leave. And the other escrow is from The money that’s going to stay with the LLC, that’s going to buy the new property. So when the closing happens, the cash goes into the correct escrow. I get my money, taxable, okay. All these other people accomplish a tax deferral in their 1031 exchange because they never got anything. They just transfer their equity from one property to another property, and that’s not taxable.

J Darrin Gross 46:33

And is there any number of of partners or members that need to go to the second deal to retain that?

Gene Trowbridge 46:44

No the number isn’t the issue. There are a couple issues that can happen number one, some of the states have rules that if the membership An LLC changes by more than 50%. The LLC is dissolved. That’s a problem because you got to take title in the same LLC. So you have to worry about that. Number two. The rules in a 1031 exchange is that what you have to acquire is a property at least of equal value with the loan, at least the same as the loan you gave up? Well, if too many people leave and take their money, maybe you’re not gonna be able to do that. Right?

So that’s just an issue of balancing equity and balancing loans now. What if too many people leave and you can’t buy all of this new property with who’s left? You can buy part of it. You can change into a tenant in common interest This new property and raise money from new investors who will buy the other tenant in common interests. So we can still solve the exchange for the equity we’re bringing over here. And then we can give new people some of whom may also have exchange money can come in as a tenant in common. So all this gets involved with the, the exchange accommodator and with the CPA for the LLC, and any new investors, their tax advisor in their accommodator but we see that quite a bit where we are today in the marketplace is anyone who bought a property 2012 1314 who still owns it has a lot of equity. And they’re all interested in how do we how do we move the equity without paying tax?

J Darrin Gross 48:53

How do we keep it?

Gene Trowbridge 48:55

Or or keep it. You know you want because no one The problem is if you pay taxes, your equity goes down. Down to buy another property and, and with the tax last day, if you just keep your property until you die, given the right size of your estate, you never do pay taxes on it. So.

J Darrin Gross 49:14

Right, right. I appreciate you you walking through that because I think that’s always been kind of I’d say some of the newer real estate investors that I’ve talked with that that are kind of in and out of something really fast or have maybe been used to kind of a stock market. In and out the taxing never doesn’t faze them. But if you’ve been in in a property for any length of time, and you’ve experienced some significant appreciation, and maybe you’ve depreciated the property down salutely, then you’ve got a whole different kettle of fish there that

Gene Trowbridge 49:51

Another question that comes up Darrin in that same issue and I get this call periodically. One of my clients will call me and we’ll say, Hey, I’m Raising money. I’ve found someone who’s got $500,000 sitting in an accommodators account. Can they invest in my syndication? The answer’s no. Because what the syndication is, what you’re buying in an LLC, is personal property. You don’t get titled to real estate. You buy shares or interest in an LLC, someone coming out of a property and wanting to accomplish a 1031 exchange needs to get title to real estate.

J Darrin Gross 50:36

Gotcha. And that’s why the TIC works.

Gene Trowbridge 50:39

That’s right.

J Darrin Gross 50:40

Because you’re on on title and

Gene Trowbridge 50:45

We’re covering a lot of stuff.

J Darrin Gross 50:47

No, it will use a wealth of information and it is nice to be able to speak with somebody that has you know, the the clarity and understanding and knowledge of all this. I got to ask you a question. And this was something I thought of just based on a a an insurance related topic protection. What kind of protection? Does the syndication provide the general partner? Or the limited partners based on the contract or is or you speak to that?

Gene Trowbridge 51:21

It’s based on state law. Okay, if you form and you use the words limited partner in general partner, which means you’re using a limited partnership, okay? If you form a limited partnership, the limited partners have absolute protection. Their only liability is what they have invested, or any promises they make to invest more money. I’ve invested $100,000 That’s it. That’s all I’m liable for, or I’ve invested 100 now and then signed a note to investment 102 years from now, when we do construction, well, I’m liable for that note, okay. But that’s all I’m liable for.

The general partner is liable for everything has unlimited liability. That’s why 99% of everything is done in an LLC. Because in an LLC, the members have the same limited liability they have in a limited partnership, but they can also vote, which they cannot do. As a limited partner, they can have any share in the management, or they’re deemed to be general partners, and then they lose their limited liability. So the limited the members in a limited liability company have total protection based on the state law. And the manager has total protection way back in the 80s when limited liability companies weren’t in existence.

The State of Wyoming was having some trouble because they’re, they’re drilling in oil and gas and all that industry. You know, we had quite a meltdown in the economy in 1981. And their industry died and what the problem was is the the wildcatters the guys who had gone out to raise the money and do all this, as limit general partners finally learned what unlimited liability meant, and they just got crucified. And the investors who are limited partners who couldn’t vote couldn’t really do anything to help save their money.

So Wyoming actually was the first state to develop a Limited Liability Company, which solved two things. It gave the wildcatters a new name, managing member and gave them limited liability. And it gave the investor a new name members and gave them while keeping the right to limited liability, gave them the right to vote. So itself to have the problems, the manager was willing to go out and take the risk, because now they were shielded with limited liability, and the investors were ready to come back in the marketplace. Because if anything went wrong, they could vote me thought at least that they could correct things. So there we are 1981. And all of a sudden, all the other states created their own individual limited liability company. So to answer your question, each state has their own rule, but generally, the manager is protected and the members are protected. doesn’t help the manager if the manager goes off and signs a recourse mortgage.

J Darrin Gross 54:50

Right. Okay. That’s That’s you. Sign up. I appreciate you you explaining that. You know, it’s funny how Much of law or you know, policy is reactive to events and get a little bit of a history there on

Gene Trowbridge 55:08

Oh, absolutely.

J Darrin Gross 55:09

How it came about there. So that’s great. Hey, Gene, before we started recording, I mentioned to you that by day, I’m an insurance broker. And as such, in insurance, we try and manage risk with our clients. And there’s a couple different strategies we typically consider. And then

The first is we ask, can we avoid the risk? If we can’t avoid it, and we look to see if there’s a way we can minimize the risk. And then if there’s not a way to avoid or minimize, we look to see if there’s a way to transfer the risk. And that’s essentially what an insurance policy is. And I’ve been asking all my guests, and I’d like to see what if you would take up the cause, but if they could consider or take a look and consider what they see to be the biggest risk. And just for clarification, I’m not necessarily looking for an insurance related answer a risk is certainly more broad than that. But if your game, I’d like to ask you, Gene Trowbridge. What is the BIGGEST RISK?

Gene Trowbridge 56:18

Okay, well, you talked about avoiding minimizing and transferring. Okay? So avoiding the risk. In my best legal language; Don’t do this! That’s how you avoid the risk of being a syndicator. Just don’t do it. And what is the biggest risk, the biggest risk is really, the investors. Never the property properties will get empty and go into foreclosure and all that you can always deal with that. Excuse me, but you can’t deal with the investor whose life changes in the middle of a project.

That’s really the BIGGEST RISK.

So simply how to avoid the risk is to don’t do it. Well, if you’re going to do it, then the question is how do you minimize it? Okay, you might minimize it by the investors you choose. You could have a strategy of only dealing with accredited investors who are rich and smart, who have enough money where they can handle the risk of your investment. That might be a good one. Another way to minimize it is make sure your manager LLC is free form correctly so that people can’t get at you. If there’s trouble, and maybe two, this is kind of an asset protection answer. Maybe you want to be an LLC yourself, and then that LLC becomes the member of your manager LLC. So they really have to go through multiple loops.

Every once in a while, I think asset protection gets a little carried away, you can have two very too many of these LLCs and tax returns and all that stuff. But that’s not uncommon for the manager to be an LLC and have the member of the manager be LLCs the one thing you don’t want to be, is an individual manager. Yet 30 investors up there, and Gene Trowbridge is the individual manager. There’s no protection for Gene Trowbridge from those 30 investors. I’m in the LLC with all the other investors are kind of protected from the outside world. But any investor can go after me for everything I have. So we want the manager to be have the layer of protection the LLC.

When I did it, it was a sub s corporation. Same protection, but today different issues that I was trying to deal with insurance and employees and all that stuff. But today almost everyone is ais aan LLC.

And then the last one How do you transfer the risk?

I don’t know if you do.

I don’t know if you do I think one thing I would say is the manager LLC is constructed in such a way that it has no assets. All you want you don’t want your let’s say there’s a commercial real estate broker listen to us and he has an office with 20 salespeople and own some buildings. That’s not going to be the managing member. We’re going to form a brand new entity that’s clean. And the only thing the managing member actually ever gets his some cash distribution for the fees and some stuff subordinated interest that might occur in the future. Okay?

So there’s nothing in there. Okay? So don’t syndicate.

Minimize your risk by having limited liability protection around you at least one or two layers. And then make sure that nothing in your syndication world, really at any time has any value. Now I do get I do get asked this question, should we buy directors insurance?

J Darrin Gross 1:00:35

I was gonna ask you that.

Gene Trowbridge 1:00:36

Yeah. I thought you should ask me that.

Our clients ask us that. And we’ve researched a lot of it. It’s very expensive, simple answer, very expensive, and doesn’t cover the crap that you do. The fraud that you do, the stealing money that you do all the stuff that managers get in trouble, doesn’t Anyhow, so don’t waste your money.

J Darrin Gross 1:01:02

Yeah, the exclusions.

Gene Trowbridge 1:01:04

Lloyds of London? Yeah, that’s where we’ve had some people who have big, big funds. And they’ll buy it. And very, very expensive. And I don’t know really what it protects.

J Darrin Gross 1:01:18

Yeah, no, I have a couple of underwriters about this. And, you know, I think that the, I think where the exposure I would think that exists or where it may be more applicable would be in a very large fund with you know, large money and the potential for a suit come from one of your investors for a quote mismanagement or something like that, but, but just like you said, if you take the money or you’re if you’re stealing, you know, crime is not a covered panel there, but, but the kind of the defense of have any kind of a mismanagement kind of thing is more of the I think the nature of the coverage.

Gene Trowbridge 1:02:02

I’ll tell you another thing that that that I just thought of the operating agreement of the company can also be a protection for the manager. In our operating agreement, we have a pretty well worked out dispute resolution provision, which is designed, I’m not going to go into all the details. It’s designed to keep you out of court. It takes you through mediation, it takes you through arbitration. And then it has some pretty strict rules like number one, no attorneys fee provision for the person who’s bringing the lawsuit that usually stops a lot of stuff.

And number two, the only remedy is your original investment. No damages. Now, I don’t know if all that’s legal, but that’s what we put in there. It’s never been challenged. And the deals that we’ve had where there have been disputes have always been resolved before we go to court.

J Darrin Gross 1:03:01

Right. Well, it’s certainly a better starting point than nothing written and no guidelines and you can test it all in court and and paying all the attorney fees and time. Gene This is this has been exactly everything. I’d hoped it would be in more. And before we wrap up, Where can the listeners go if they would like to connect, or learn more?

Gene Trowbridge 1:03:27

All right, well, our website is www.crowdfundinglawyers.net. And it’s a great website. We have all sorts of things on we have a YouTube channel, we have all sorts of stuff. You can reach me at Gene@crowdfundinglawyers.net. That’s probably the best way to work with me. I typically use my emails like a telephone. If you send me an email, and it’s an important question, I’ll just call you. So if you’re going to send me an email, and you want We do call you make sure you put your phone number in there. And then other than that, I have to send you an email and say, hey, I want to talk to you about this, but I can’t, because I don’t have your phone number. So the best thing to do would be Gene@crowdfundinglawyers.net. or just go to our website and if you want a if you want a consultation with me, you can sign up at the website for a 15 minute or a half hour consultation with me and that works also Darrin

J Darrin Gross 1:04:27

Awesome. Well, Gene, again, I cannot say thanks enough for taking the time. have enjoyed it immensely. learned a lot and I hope we can do it again soon.

Gene Trowbridge 1:04:38

Okay, thanks, Darrin. Appreciate it.

J Darrin Gross 1:04:40

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. C R E P N Radio

Commercial Real Estate Lending with Leslie Smith – CREPN #245

Today, my guest is Leslie Smith. She is the managing director for Commercial Direct, a National Small, balanced commercial real estate lender. And in just a minute we’re going to speak with Leslie about commercial lending for commercial real estate. But first a quick reminder, if you like the show, CREPN Radio, please let us know. You can like you can share you can subscribe, and as always, you can leave a comment. We’d love to hear from our listeners. And normally also want to just let you know that we do have a YouTube channel. If you’d like to see how attractive our guests are, you can check that out. It’s a commercial real estate pro network. Today we’re not the video option but just so you know that is available. With that I want to welcome my guest, Leslie, welcome to CREPN Radio.

Leslie Smith 0:55

Hi, thank you for having me.

J Darrin Gross 0:57

I’m so glad you could join us today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Leslie Smith 1:08

Sure. Hi, everybody. My name is Leslie Smith. And I, my background really started in banking, like many people, but I started in the call center area. So I ran a call center for many years and then moved over to lending for a private company. And the reason I found that interesting is because if anybody’s worked for a bank, you know, there are a lot of restrictions. Innovation is tough, and in product development and managing a team and making decisions and so moving outside of the banking space, but still in lending was really, you know, exciting and fun. And that’s where I’ve been since then.

J Darrin Gross 1:47

Got it. And you mentioned you were in a call center was that for commercial or was that for residential or

Leslie Smith 1:55

it was mostly residential and mostly credit cards, so highly regulated?

J Darrin Gross 2:00

Got it. Got it? Well, for conversation today, wondering if maybe a good starting point is just the difference between commercial and residential lending.

Is that a fair place to start?

Leslie Smith 2:16

Sure, sure. So, you know, I think, for when you talk about small, balanced commercial, you know, people, there’s different variations of what people think is small. But my business is small. I mean, I start loaned out 100,000. And then up to two, two and a half million and why I start there is because when you’re thinking about someone purchasing a home, you know that that range is much more reasonable than what people think about commercial lending, which is like million to 50 million, 100 million, right. And I think the business itself differences, you know, I am helping small business owners either buy the property that they’ve been operating their businesses in, or I’m helping investors buy single family homes or multi families for investment purposes, you know they’re in they’re trying to grow, build their worth with their, their their wealth and and grow that nest egg. So the main difference between us is a residential lending is someone really buying a home and purchasing a home for themselves and their family. My business is about someone either growing their business or investing in real estate.

J Darrin Gross 3:29

And do you guys do you work direct with consumers or investors or do you go through brokers or how’s that work?

Leslie Smith 3:39

commercial direct, straight direct to the consumer. So consumers come to me directly. A lot of times they are referred maybe by a realtor or a CPA or a lawyer. But a large part of my business is really digital. So people are googling they’re doing their own research or trying to get informed and they come through me through to me through my website.

J Darrin Gross 4:01

It’s amazing how that works anymore. It used to be that you had to have an ad in the yellow pages or something like that. But if you’ve got, if you’ve got some information that people are looking for, they will find you. So,

Leslie Smith 4:17

yeah, definitely, definitely. I mean, I think it shows like this also, it really helped people really understand what’s out there and what’s available.

J Darrin Gross 4:25

Right. So you mentioned small balance, hundred to 2.5 million. Is there a definition for small balance? Or is that basically what you’ve kind of defined it for your your business?

Leslie Smith 4:41

It’s what I’ve defined for my business, I think, you know, when, when in when I go out into the world and I talk to professionals in the lending and commercial lending world, some people say small balance starts at 5 million. And you know, there there are specific people in this industry that there they start at five, there’s others that start at you know, 100 million. So it really is, we’ve defined this as a small because we feel that this is where our space and where our bars are going or needing financing.

J Darrin Gross 5:12

Gotcha. And and are you placing it with like Fannie or Freddie product? Or is this more stuff where

Leslie Smith 5:22

you guys are holding the paper? Or can you? We are so we don’t do any agency. So we are when we when we think of our business we think of we’re lending to people that probably would not be eligible for an agency loan, or would not probably be eligible for a traditional bank loan.

J Darrin Gross 5:41

Gotcha. And for for the listeners, can you express some of the reasons why somebody might not qualify at a bank that would be a good option.

Leslie Smith 5:51

Um, well, this one is credit always so you know where your credit score is. The second thing would be the property type. You know, what is it we land on you know, not your you know, trip, you know, multi families and, you know, really pretty office space, you know, we tend to lend the daycares or restaurants, the bars, the, you know, car repair shop. So, these are property types that a lot of lenders really stay away from. On the agency side, you tend to need need to have experience and you are going to go through a full underwrite of all your personal and business tax returns. And so our program allows you if you want to go the route of full documentation, we can or if you know, we can do an alternative way of looking at you and your business, we have those options as well.

J Darrin Gross 6:47

Gotcha. And is there a length of time that you guys typically hold or a note as a like a short term loan or these is to the mature

Leslie Smith 7:00

Sunil a balloon are, yeah, we have six products, typically our, you know, our typical bar right now, we’ll take a, our average loan size of about 420,000. They typically take a 30 year fixed mortgage, which is really unheard of and commercial 30 year fixed mortgage is typically very much a residential product. But we’ve decided that, you know, for some of our small business owners are not looking to hop around to get alone, you know, every two, three years, every, you know, six months, they really want long term financing. So, our typical bar is in our loan for 30 years. You know, the ELP, you know, loan to value is about you know, 70% and it has a 30 year amortization.

J Darrin Gross 7:44

And for that, is there a kind of a rule of thumb as far as kind of a rate range compared to like what somebody you know, might have heard on TV or something they were they expect to get, you know, advertised rate as opposed to, you know what you’re able to provide.

Leslie Smith 8:04

So typically, you know, our starting rate is about five and a half our typical bars probably a six and a half. Um, depending on the credit score and pricing for us, it’s really driven by your your app your FICO. And again, that’s something different than commercial, you know, typically commercial loans, you know, the the credit score of the individual is not really taken into account when it comes to developing or providing terms. Our starting point is our credit score. So you know, depending on your credit score, then that’ll drive the your rate and your loan to value

J Darrin Gross 8:38

check and you said loan to value go typically as much as 70%.

Leslie Smith 8:44

We love to 80% depending on your credit score.

J Darrin Gross 8:47

Okay, gotcha.

Leslie Smith 8:50

And other the other piece that’s different for us is you know, we also give cash out on commercial to people people know about cash out, you know, when they think about their You know, taking out a line on their residential home on home equity line, it’s rare that you can get pull cash out of your commercial investment property or your own owner user property. And that’s another feature that I think bars are seeking. They’re seeking to reinvest in their own businesses and take out cash from the equity that they have in the property. Or you have an investor that has equity on a property and wants to buy another one.

J Darrin Gross 9:26

True. What about somebody that’s that’s purchasing a property that needs some repairs or there’s some sort of renovation budget that they have in conjunction with the acquisition price, is that anything you’re able to provide funding for?

Leslie Smith 9:44

We are looking for stabilized properties. So if there’s really large fixing of the property in order to reposition it and rent it, we that’s not the product that we’re looking for. We’re looking for something that’s pretty much like so Have any percent occupied and that it does need some repair, it’s very cosmetic in nature and not you know, fully I need a roof we need to build, there’s a complete build out, we consider that more of a fix and flip or a construction loan. And you know, that’s not our product. Gotcha.

J Darrin Gross 10:21

You mentioned or we were talking about kind of like qualifying our new investors, are they are you able to work with a newer investor?

Leslie Smith 10:30

We are we are.

J Darrin Gross 10:32

Alright. And what about like debt cover ratio? Do you do you underwrite to a certain percentage?

Leslie Smith 10:40

We do debt service minimum for us is 1.15.

And our minimum credit score is 650.

J Darrin Gross 10:49

All right, well, it certainly seems like that opens up opportunities for

Leslie Smith 10:55

you know what some banks may decline

J Darrin Gross 10:59

Do you think Find it like investors that have a large portfolio. I know, you know anymore borrowing money at a bank that has to follow all the Dodd Frank stuff, it gets kind of a narrow window of opportunity. I’ve talked with numerous investors and it’s, you know, whether they’ve got a number of loans or maybe they’re self employed or, or, you know, what have you. They may not qualify, even though their, their balance sheet is plenty strong and they make plenty of income. Is that somebody that would be a prospective borrower for you?

Leslie Smith 11:38

It would, and just like me, there there, there are many other, you know, companies that really are focused on that bar. They’re really looking at that experience, and the fact that they’re building that, you know, our rail schedule, so there’s definitely opportunity for those and for us in particular, definitely.

J Darrin Gross 11:57

Got it. So stabilized property. qualified lender and suitably qualified borrower.

Leslie Smith 12:05

And longer terms.

J Darrin Gross 12:09

Is that kind of the sweet spot for you guys?

Leslie Smith 12:12

It is and just as a, you know, we, you know, our average days to close is about 48 days. So when you think about a commercial loan and the process to get a loan closed, you know, that’s pretty much and more in line with residential than it is with standard commercial.

J Darrin Gross 12:29

That seems pretty, pretty aggressive. They’re

gonna ask you

talking about closing time, if you can’t remember now, who can you as far as the the, you mentioned, like the the average loan amount is there? You typically are most of your borrowers, are they owner occupied type things with you know, like an actual business you mentioned yourself do that or is it more defined more of the investor that’s

buying for a non owner occupied?

Leslie Smith 13:06

It’s a 6040 split for us. So 60% of what we see is investor and 40% is owner.

J Darrin Gross 13:15

Gotcha.

I’m trying to think of there’s Is there any Can you point any other like a highlight or a low light or a challenge you’ve seen that people, you know, may not hear about in the, in the normal course of getting alone that you guys have been able to overcome?

Leslie Smith 13:36

Yeah, I think that, you know, I think a story is really important, you know, especially when you’re talking about a small business owner and I think that it’s important for us, you know, small business owners, you know, especially when you think about, you know, a small business making it through the last recession, it’s pretty incredible. And so I think another a differentiating factors, a lot of data we can pull we can look at a lot of different things but a small business owner someone that’s looking for a $300,000 loan, you know, their documentation could be messy, maybe not as organized and maybe, you know, a traditional tax return, you know, even a bank statement might tell you, right, that tell you the story that this person can run their business. And there’s value in that real estate. So I think a differentiate is for us, it’s like, it’s important for us to know because ultimately, what we want to figure out is this person’s going to pay and if they’re, if this is their bread and butter, this is how they plan to retire or this is where this is a family owned business. It’s important to understand those types of variables.

J Darrin Gross 14:35

No, that makes complete sense. I my dad was a banker all through his career and and I didn’t understand what he did you know, I it just didn’t make sense to me but your money in the bank and, and at the time, you could get interest but, but I know looking back that, you know, a lot of what he did was, you know, somebody come over And, and my dad and the other person needed to be in the kitchen or they’d be on the driveway and talk and and, and a lot of that getting to know somebody and kind of understanding what their story was was really important to making the relationship and and, you know, essentially qualifying for the loan so it makes sense. Do you guys have any kind of territory restrictions?

Leslie Smith 15:26

We’re a national lender, I think we’re, you know, I would say where we’re not lending is really rule. So like you’re talking about the North Dakota, South Dakota is I think that’s where we stay away from. But but generally in a major, you know, we there’s 40, we lend in 40 in 46 states. So, it’s pretty much covered the math. And we, you know, we have we have a varied amount of different property types that we land on. So I think that that’s of interest to bars, because a lot of times it’s Doesn’t that cookie cutter? You know, it’s not you know, something that someone can really understand easily. Typically it’s even, it’s just a no

J Darrin Gross 16:10

doubt you mentioned you know how you guys go on FIFO but then you you’d mentioned kind of the property type and the occupancy type is Do you find it is more of the non mainstream occupant is kind of your your sweet spot on that?

Leslie Smith 16:33

Yes, definitely. Okay,

J Darrin Gross 16:35

gotcha now so you’re talking about the auto shops and, and not so much multifamily. But anything that that? Well, so you’re Bankston, not to William nuts. That’s a good opportunity for you.

Leslie Smith 16:51

As very few people understand like warehouse or sell storage or light industrial like, you know, for a banker, it’s like What does that look like? You know, you know, what would the appraisal look like? And for us that’s that’s really very much our sweet spot.

J Darrin Gross 17:09

And you know, this is kind of more of a curiosity of mine. When you when you underwrite for the loan and that valuing a property if it’s a unique property or something, are you looking based on the again because it’s stabilized and you can you can basically factor in what the current rents are the current tenants pain, is that kind of your starting point for an income analysis.

Leslie Smith 17:38

So we do order an appraisal for each of the properties and typically the instruction to our appraiser when they go out is that they also look at comps locally, you know, what, locally what other sales were there with a similar type of structure. You know, sometimes it’s it’s easier to get that Calm depending on if you’re in, you know, in any of the boroughs in New York or in Miami, Florida, pretty easy to get comps, other places not so easy. But then that’s the starting point for us that value really will come with the comparison to other properties like it

J Darrin Gross 18:20

is an insurance guy I got to ask is his flood, you know, properties in a flood zone or anything like that is that that’s something that you guys shy away from? Are you as long as there’s flood insurance in place for that? That’d be something you’d be able to do.

Leslie Smith 18:33

Yeah, we’d be able to do that. So um, we do run a flood cert at a fair and then we will we’ll let the borrower know that it’s in a flood cert and if they have flood insurance.

J Darrin Gross 18:44

Gotcha.

Hey, Leslie. Before we started recording I mentioned to you by day, I’m an insurance broker. And as an insurance broker, we work with our clients to manage risk. There’s a couple of different strategies we, we look to the The first is we ask the question, can we avoid the risk? If that’s not possible, then we ask, Is there a way to minimize the risk? And if we can’t avoid it or minimize it, then we look to see Is there a way we can transfer the risk? That’s essentially what an insurance policy is. And I like to ask my guests, if they can take a look at, you know, whether it be their business or the way they see, you know, real estate investors, if they can identify what they consider that the biggest risk. And just to be clear, I’m not necessarily looking at or looking for a an insurance related answer, because I do believe that, that risk is everywhere. But if you’re willing, I’d like to ask you, Leslie Smith, what is the biggest risk?

Leslie Smith 19:54

I think, you know, I’ll speak about investing. I think what’s really important when We see investors, one of the things that it’s hard for us, and when we’re trying to when we’re when I mentioned earlier about the story is that, you know, they don’t really know what their objective is as an investor. So, you know, if they don’t have like, an objective is okay, I want to, I want to own 12 properties, and they need to live like this, and this is how I’m going to manage them, it’s really difficult for us to see whether they’re going to be successful in growing that real estate portfolio. You know, you know, investing in real estate is not it’s not a sprint, it’s a marathon. And you really have to be methodical and thoughtful about what you’re doing. Because you can get yourself in a lot of trouble, you know, quickly, and you know, and that’s your nest egg that you’re building. I think risk is that there’s a lot of folks that say, Oh, you know what, I don’t really want to invest in stocks, and I think I need to buy real estate. They’re just they’re not thoughtful about the plan, and then the plan. Then if you don’t have a plan, then what kind of lender Are you going to, you know, seek, and that could get you into some not so great. loans. And we’ve seen that a lot with refinance people were, you know, they thought they were getting, you know, they were buying this property and it was their investment and then, you know, it’s like a double digit rate, and that’s tough. And so that’s really what we see as risky, because then you have a lot more default, you have a person that, you know, really thought they were making a smart investment, and really protecting themselves long term. And it turned out to be, you know, a loss for them.

J Darrin Gross 21:26

No, that’s, that’s great, great input there. I think the I am going to plan and understand the time it’s going to take to execute the plan. It’s definitely more than just a click of a button and, and, you know, try and watch it go up kind of thing, which I think unfortunately, in this digital age, there’s a lot of people that get kind of swayed by, you know, recent success that people have had and they get all excited and, you know,

Leslie Smith 21:57

y eah, and

J Darrin Gross 21:58

so definitely No worthy there appreciate you sharing that. Leslie Where can the listeners go if they would like to learn more or connect with you

Leslie Smith 22:10

to listen to they go to my to our website, commercialdirect.com, And you can either call us, you can chat with us so you can apply online. There’s a lot of information about commercial real estate if you’re new to commercial real estate, so we put a lot of educational blogs and videos to help people kind of go at their own pace. It’s up to them, you know how they want to interact with us.

J Darrin Gross 22:33

It’s great. Leslie, I can’t say thanks enough for taking the time. I’ve been enjoyed talking with you learned a lot. And I hope we can do it again soon.

Leslie Smith 22:44

Thank you, Darrin. Appreciate it.

J Darrin Gross 22:46

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro network. CREPN Radio

Capital Market Trends with Bryan Shaffer – CREPN #224

Capital Market trends are a barometer for where the commercial real estate market is headed.

Bryan Shaffer is the Principal Managing Director at George Smith Partners. GSP is a boutique capital market resource providing owners & developers the structure capital needed to complete projects nationwide since 1979.

The value of utilizing a broker like George Smith Partners is that they are in the market every day, and know when it is more beneficial to utilize one option over the other. This compares with a bank who has one model. The capital market is continuously changing. They work for the client in hope to create a relationship that continues to help the borrower get the money needed to grow their business.

Commercial Real Estate Financing

Large commercial real estate projects come with tremendous risk. The borrower sees opportunity, while the lender sees the risk. If the lender does not feel comfortable with the borrower or the project, they will not finance the deal. An experienced finance professional has the needed relations with the various lending products. They can help the borrower explain their project to a prospective lender that will assure the lender of the projects upside, and set them at ease with the potential downside.

Capital Source

Most new investors use their own capital and raise additional funds from family and friends. A proven track record with successful, profitable projects will attract investors with capital who are looking for lower risk.

Mistakes Borrowers Make

The most common mistake borrowers make is to not focus on one particular market. If you are constantly chasing the next hot market, you will never develop the intimate local knowledge that puts makes investors confident you know the market.

Sweet Spot

GSP is best suited to help the owner or developer who is focused on finding deals and needs help raising capital. In these situations, they can partner with the project owner to locate the capital needed to finance the project. This allows the developer time to find more deals.

An ideal partner for GSP is someone who has done multiple smaller deals in a specific market and has intimate knowledge of the market. They have the market knowledge, but need help with raising capital. This is the perfect opportunity to work with GSP.

Relationships

Commercial real estate is all about relationships. For owners looking to grow their portfolio and needing help to solve the capital requirements, GSP can be the solution. Their extensive network of capital sources include traditional sources such as commercial banks and insurance companies. Additionally, they have multiple new capital disruptors such as crowdsource funding and private equity funds like BlackRock and Blackstone, which are not available to all mortgage lenders.

A perfect borrower is one focused on growing their portfolio, like the client they helped grow from two apartment properties to over thirty properties. GSP was able to help bridge the gap from $10 million properties to $50 million properties.

Capital Stack

The capital stack needed for a deal is made up of debt and equity. For both single operators and syndicators, the traditional sources of equity come from the individual developer, friends and family while debt has come from banks and institutional lenders.

The recent disruption of the financial market has made crowdsource financing a viable source of capital. Additional private equity funds like BlackRock and Blackstone are resources available to GSP, which may not be available to all mortgage lenders.

Markets

The market is client specific. If you are a proven developer in one market, that does not guarantee success in a different, new market for you. Lenders look for the borrower who has knowledge of the market based on their experience in the market.

A mistake many developers make is trying to follow the hot market. Jumping from hot market to hot market is not the path to proven success. Lenders want to know that you know what you are doing, and that you have success in the market.

Lenders like larger markets that provide insulation from failure based on the large number of potential opportunities to guarantee your success.

Deal Sponsor

Lenders want to know that the deal sponsor has experience and success in the market your project is located in. The lender wants to make a safe bet that you will be successful. This is different than the borrowers perspective. The borrower wants big returns, the lender wants small safe returns.

Asset Class

Each asset class has its unique risk. Lenders like to lend to a low risk opportunity where they know they their investment is protected and will get paid back. The following are some examples of assets and situations where George Smith Partners were able to provide financing solutions to their clients.

Hotels are considered one of the more risky asset classes. They are susceptible to the winds of the economy. If there is a terrorist event, economic downturn or similar event, people will not travel as much nor rent hotel rooms.

To make a hotel less risky, GSP was able to do some additional research and apply their experience in the market to recognize the upward trend and make the case to a lender and get they borrower their loan.

Multifamily on the other hand, has more predictable demand and is less susceptible to down turns. People need a place to live. When the economy slows down, people lose their homes and need a place to live, so they rent. As long as you operate and keep the property full, the lenders will get paid, and they like that.

Office A recent office project where GSP was familiar with the marketplace gave the developer the help needed to complete the project. Because GSP recognized the positive trend developing that other lenders had neglected to see, they were able to get the financing for the borrower to needed to complete the project.

Rate and Terms

Most borrowers are excited to get a low rate for their loan. However, too often, borrowers fail to think through their plan for the asset they are financing. Is there a yield maintenance penalty that prohibits the borrower from selling or refinancing early? Failure to recognize this can on the front end can ruin your otherwise profitable deal.

Cycle

The Real Estate market cycle goes up and down. For the past 10 years the cycle has been on the increase, compressing CAP rates, and driving prices higher. As the cycle continues, markets that have been hot are cooling as investors refuse to push prices higher, and instead they look to secondary markets for higher returns.

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”

BIGGEST RISK: To me, I mean, you know, we are in the risk reward business. I mean, people get loans based on the level of risk. If it was a very risky loan, you pay twelve percent. If it’s not such a risky loan, you pay three or four percent. So we’re always looking at risk.

But if I look at a more global risk to my business and really to the market as a whole, I think you’ve got to think about the economy and what causes a real estate downturn and what influences a market to go from being a very hot market to a very cold market. And really its activity. So when activity dries out, when people stop buying properties, people stop selling properties and people have fear when people are thin or they don’t move.

For more go to:

Website: https://www.gspartners.com/

Call: (310)867-2906

BIGGEST Risk with J. Darrin Gross – CREPN #200

What is the BIGGEST Risk Real Estate Investors face?

Merriam Webster defines risk this way:

possibility of loss or injury

In Real Estate, Risk is everywhere. It’s what you don’t know can hurt you.

That can be a problem when you are talking about millions of dollars.

This is why so many wise, experienced investors place a premium on knowledge and so much effort is spent in due diligence.

Most investors agree that you can never know everything, but you can dig in and ask questions and get answers that make sense for you to go forward.

By day, I am an insurance broker. My focus is working with Real Estate investors to assess their exposure to loss and help them manage the risk.

Risk Management Process

Risk Management is a continuous process. There are four basic steps to risk management:

Identify
Assess
Manage
Review

Risk Management Strategies

In insurance, we utilize three specific Risk Management strategies:

If the situation is too risky, Avoid the risk
If there are things we can do to Minimize the Risk
What can you do to Transfer the Risk?

Risk in Real Estate

Where is the risk in real estate? This is the question you have to look for when you buy a property. It’s your job to find where the risk is hidden, because the seller will not tell you. The due diligence period is your opportunity to go through the property from top to bottom looking for the hidden risk. You also need to comb through the numbers to find out what is missing, and where you can make things better.

Depending on what unexpected information you find during due diligence, the purchase process provides you an opportunity to present your findings to the seller. The seller can offer to correct the problem, or provide you a discount on the price. If you fail to find these hidden issues, and address with the seller, they are yours. Once you close, the property and the problems you did not find are yours.

Metropolitan Statistical Area

What do you know about the Metropolitan Statistical Area you are investing in?

What is the median income?
Who are the largest employers?
What are the market rents?
What is the population of the market?
What is the forecast for jobs in the market?
Who is the competition in the market?
What is the local government attitude towards landlords and tenants?

Beyond, the MSA, you want to understand the neighborhood you are investing in. In many markets, a mile can make a big difference. These are all numbers you want to know and understand to see if they will be able to support your investment model.

Physical Condition of the Property

The physical condition is where you look for deferred maintenance and assess the major building systems, Roof, Electrical, Plumbing and Heating & Cooling. How much life is left in each? What is the cost to replace? These questions need to be answered so you can properly budget for replacement. If you fail to budget for these, the unexpected cost will negatively affect your cash flow and make for some potentially difficult conversations with your investors.

Financial Condition of the Property

What is the Financials condition, what do the books look like? Are the Seller’s records in order? What is missing? What is out of the ordinary? This is where you dive deep into looking for things that are missing and or out of the norm.

A high water bill is a tip off for leaks, and something you can fix and reduce your cost. How do the rents compare to the market rents? Is there room to increase rents? Is there any record of laundry income? Some small property owners put the cash in their pocket without recording. This can be a hidden source of value not expressed on the sellers financials.

Regardless of what you find from the seller, you must contact each service provider and find out what your actual cost will be. If the seller has owned the property for a long time, or owns multiple properties, their cost will be less than yours. Anything you can do to improve the net operating income should be part of your value add strategy.

Management

Management is one of the greatest ways to lose money in real estate. Is management pushing rents? Are they marketing the property to attract quality tenants and turn vacancies quickly? This is an easy area to improve upon, especially if the property has not been professionally managed.

If you are investing with others, what is the experience of your partners or deal sponsor. Are they experienced in this asset class of real estate investing? What makes you certain you will be able to achieve the returns you are projecting?

Purchase Price

Your purchase price needs to accurately reflect the value for the property as is. An experienced investor will not pay more than what the property supports. The seller and the seller’s broker job is to get as much as possible. Your job as a buyer is to stay disciplined and not over pay. You cannot get in a bidding war driven by your emotions.

Too often, sellers agree to a sale price with a higher offer only to learn that the buyer cannot perform. If the seller really wants to sell, and no offers meet their ask, they will be forced to deal with the reality of the market.

Financing

Due to the significant price of large commercial real estate deals financing is required unless you have an endless supply of money. Fortunately, commercial real estate financing looks at the performance of the property. The bank will not lend more than the property can support.

The bank will require at least 125% debt cover ratio. If you don’t understand this before you make your offer, you may lose earnest money or the deal. Neither is a good option. If either happens, you will not be recognized as a performer amongst the local commercial real estate professionals.

Insurance

Insurance is easy for new buildings with desirable tenants. There is an unlimited supply of insurance companies ready to provide coverage for this type of risk. As your building gets older and has more deferred maintenance, you will have challenges finding insurance.

To avoid any problems with insurance, pay attention to the age and type of building system in place for: roof, electrical, plumbing and HVAC. Most insurance companies require updates if these are older than 30 years. During your due diligence, ask and find out age and type of building system in place.

Market Cycle

Where are we in the market cycle? Are there reasons to be concerned, or is there momentum and demand for you to take advantage of. Do not assume that the most recent past will continue. Markets ebb and flow, and for every top, there is a bottom. If you are buying at the top and selling at the bottom, you are doing it wrong.

Exit Strategy

What is your exit strategy? Every property will eventually sell, so what is your exit strategy? Your strategy will be very different if you have partners compared to if you are investing solo. How quickly can you return capital to your investors? What rate of return are you projecting? What happens when you get there and the market does not support selling?

The Unknown

Any experienced investor knows there are additional lessons, the unknown, waiting for you. To prepare for these, you have to do your homework up front and make certain our capital reserves are sufficient to take care of these when they happen.

BIGGEST RISK

As an investor, you have to understand these lines, and create your own lines you will not cross. In an effort to learn more about investors, their risk models and the lines they will not cross, I began asking the guest on my weekly podcast CREPN Radio the question,

What is the BIGGEST RISK?

To my delight, the guest have shared what concerns them and what they do to manage their risk. Theri answers have covered the spectrum of real estate investing.

Following is an example of the answers guest on CREPN Radio have provided.

For more go to:

www.crepnradio.com

CREPN #150 – Joint Ventures: The Cheapest, Easiest, Fastest and Safest Way to Do Deals with OPM with Jeff Lerman

Joint ventures are an option every real estate investor should know.

Growing your real estate portfolio is capital intensive. Eventually you will run out of your own money. When real estate investors reach this point, you have to look for other people’s money, OPM in order to keep growing.

Jeff Lerman, the Real Estate Investors Lawyer, works with real estate investors. He takes us through the benefits of joint ventures compared to syndication.

What is a Joint Venture

A joint venture is the coming together of two or more parties to achieve a goal. It is the cheapest, easiest, fastest and safest way to do real estate deals with other people’s money.

The members of the joint venture must take an active role in the work to meet the goal. Investors cannot be passive. Roles must be defined, and records must be kept in order to satisfy any legal challenge of the legitimacy of the joint venture.

Main advantages of a Joint Venture:

Risk diversification, is the primary benefit of a joint venture. You are able to spread your risk from an all or nothing position. Your potential loss can be lessened when you invest across multiple deals.

Risk mitigation, You gain the input from an experienced investor to test and confirm your conclusions on the opportunity, will it work, or should you pass.
Not a security. A joint venture does not require the extensive legal paperwork which is required in a syndication.
Potential for future deal flow. When you join forces with an experienced investor, you are likely to be invited to participate in future opportunities provided the original deal goes well.

Simple to set up. Unlike a syndication, a Joint Venture is not a security and does not require the extensive legal expense associated with a syndication. There is no private placement memorandum, etc when establishing a security.

In all cases, joint venture or syndication, pick your partners wisely. Set it up right. The last thing you want is to get tied up in some lengthy, costly litigation that tears apart the wealth you have worked so hard to build.

For more go to:

http://www.realestateinvestorlaw.com